COURSES  OF  STUDY  IN 

CORPORATION  FINANCE 

\N D  INVESTMENT 


INVESTMENT  BANKERS  MSOCIATION 
OF  AMERICA 


GIFT  or 


Digitized  by  the  Internet  Arciiive 

in  2007  with  funding  from 

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COURSES  OF  STUDY 

IN  CORPORATION  FINANCE 

AND  INVESTMENT 


Courses  of  Study 

in 

Corporation  Finance 

and  Investment 


New  York 
Doubled  ay,  Page  &  Company 

for 

Investment  Bankers  Association 

of  America 

1917 


10^; 


.^■^  v^!^. 


^' 


0^^ 


Copyright,  igiy,  by 
Investment  Bankers  Association  of  America 

All  rights  reserved,  including  that  of 

translation  into  foreign  languages, 

including  the  Scandinavian 


INVESTMENT  BANKERS  ASSOCIATION 
OF  AMERICA 

Education  Committee 

Lawrence  Chamberlain,  Chairman 

E.  W.  Bulkley  A.  W.  Bullard 

Preparation  of  material  by 
Hastings  Lyon 


Neither  the  Investment  Bankers 
Association  of  America  nor  its 
Education  Committee  assumes 
responsibihty  for  any  statements 
made  in  these  outHnes  or  in  any 
books  referred  to  in  the  outHnes. 
The  books  were  selected  with 
regard  to  their  general  availability, 
and  without  prejudice  to  any  other 
books  treating  of  the  same  subjects. 


3GS08 


^ 


y 


0^^ 


Copyright,  iQiy,  by 
Investment  Bankers  Association  of  America 

All  rights  reservedy  including  that  of 

translation  into  foreign  languages, 

including  the  Scandinavian 


INVESTMENT  BANKERS  ASSOCIATION 
OF  AMERICA 

Education  Committee 

Lawrence  Chamberlain,  Chairman 

E.  W.  Bulkley  A.  W.  BuUard 

Preparation  of  material  by 
Hastings  Lyon 


Neither  the  Investment  Bankers 
Association  of  America  nor  its 
Education  Committee  assumes 
responsibihty  for  any  statements 
made  in  these  outHnes  or  in  any 
books  referred  to  in  the  outHnes. 
The  books  were  selected  with 
regard  to  their  general  availabiHty, 
and  without  prejudice  to  any  other 
books  treating  of  the  same  subjects. 


3GS08 


r> 


PREFATORY 

About  two  years  ago  at  the  written  request  of 
several  members  of  the  Investment  Bankers 
Association  the  Board  of  Governors  appointed 
a  Special  Committee  consisting  of  Lawrence 
Chamberlain,  Chairman,  E.  W.  Bulkley  and 
A.  W.  Bullard,  to  consider  the  expediency  of 
compiling  and  printing  a  text  or  texts  of  subject 
matter  relating  to  the  business  of  investment 
banking  with  the  primary  idea  of  assisting  in 
the  work  of  educating  the  relatively  inexperi- 
enced bond  salesmen  in  those  things  which  can 
be  taught  from  books. 

As  the  work  of  the  Committee  progressed 
two  things  became  evident:  first,  that  the  writ- 
ing and  printing  of  a  series  of  text  books  would 
be  too  large  an  undertaking  for  this  organiza- 
tion— at  least  at  the  present  time — and  second, 
that  if  it  were  desirable  to  undertake  anything 
in  the  line  of  educational  work  the  scope  and 
purpose  should  be  broadened  to  include  sug- 
gestion and  guidance  to  college  and  university 
instructors  in  finance. 

Accordingly,  the  Committee  so  reported  at  the 
Convention  held  in  October,  1916,  at  Cincinnati. 

By  an  almost  unanimous  vote  the  members 

[vii] 


of  the  Association  in  Convention  requested  a 
continuance  of  the  work  of  the  Committee 
and  at  a  subsequent  meeting  of  the  Board  of 
Governors,  at  which  a  comprehensive  report 
with  exhibits  was  presented  to  the  Board,  it 
authorized  the  Committee  in  its  discretion  to 
pubUsh  the  material  submitted  in  such  form 
and  under  such  arrangements  as  seemed  desir- 
able. The  advent  of  America  into  the  war  and 
the  necessary  absence  of  the  members  of  this 
Committee  from  their  offices  and  regular  duties 
in  furtherance  of  the  flotations  of  Liberty  Bonds 
has  delayed  somewhat  the  completion  of  its 
work  which  otherwise  would  have  been  ready 
for  the  members  in  its  entirety  at  the  conven- 
tion in  Baltimore  in  November,  191 7.  The 
total  plan  of  the  Committee  embraced  the  pub- 
lication of  outlines  of  six  courses,  a  bibliography 
and  a  statement  of  the  legal  principles  of  a 
mortgage.  The  items  referred  to  are  as  fol- 
lows: (i)  An  outUne  of  a  course  in  Corpora- 
tion Finance;  (2)  An  outline  of  a  course  in 
Investment;  (3)  An  outline  of  a  course  in 
Railroad  Securities;  (4)  An  outUne  of  a  course 
in  Public  Service  Corporation  Securities;  (5) 
An  outline  of  a  course  in  Government  and 
Municipal  Securities;  (6)  An  outline  of  a  course 
on  the  Practice  and  Principles  of  the  Stock 
Exchange;  (7)  A  Hst  of  books  on  Investment 
Finance;  (8)  A  statement  of  the  Legal  Prin- 
ciples of  a  Mortgage. 

All  of  this  work  has  been  reduced  to  something 
like  final  form  but  since  the  Committee  desired 

[  viii  ] 


its  labors  to  be  supplemented  and  revised  by  a 
number  of  specialists  in  the  several  topics 
treated,  and  since  returns  from  all  the  special- 
ists are  not  yet  at  hand,  it  has  seemed  best 
to  prepare  for  publication  at  the  time  of  the 
convention  in  Baltimore  merely  the  first  volume 
containing  the  outlines  of  the  two  general 
courses  in  Corporation  Finance  and  in  Invest- 
ment which  comprise  this  book.  With  this 
volume  in  the  hands  of  all  of  our  members  and 
of  many  instructors  in  finance  throughout  the 
country  it  will  be  possible  for  the  Committee 
to  benefit  by  the  frank  and  detailed  criticism 
it  hopes  to  receive  so  that  the  subsequent 
volumes  may  obtain  the  benefit  of  business 
practice  and  classroom  experience. 

The  Committee  thought  that  these  outlines 
should  be  in  considerable  detail  and  fully  an- 
notated with  references  to  available  works  in 
finance,  so  that  even  a  man  working  without 
any  personal  assistance  to  get  some  knowledge 
of  the  subject  might  find  careful  direction  for 
his  endeavor.  The  Committee  also  thought 
that  these  outlines  would  furnish  useful  guides 
to  any  one,  whether  a  bond  house  manager  or 
a  university  professor,  seeking  to  give  instruc- 
tion in  those  aspects  of  finance  in  which  this 
Association  is  especially  interested;  and  that 
they  would  help  to  standardize  and  establish 
on  a  sound  basis  a  statement  of  the  principles  of 
finance  without  knowledge  of  which  legislation 
aflPecting  this  form  of  business  activity  is  likely 
to  injure  the  welfare  of  the  country. 

[ix] 


Perhaps,  also,  the  outlines  will  serve  as  an 
indication  to  the  bond  man  of  the  amount  of 
knowledge  of  principles  and  general  informa- 
tion, as  distinct  from  information  about  par- 
ticular securities,  that  he  ought  to  have  as  a 
basis  for  his  work.  The  Committee  has  no 
thought  that  the  study  indicated  will  in  itself 
produce  competent  bond  men.  The  Committee 
is  concerned  only  with  that  part  of  the  bond 
man's  equipment,  whether  it  be  of  great  or 
little  importance,  which  consists  of  his  gen- 
eral knowledge  of  investment. 

HOW  TO  USE  THE  OUTLINES 

These  outlines  have  been  prepared  as  an  aid 
to  the  study  of  that  branch  of  fiscal  operations 
which  has  to  do  with  financing  fixed  capital. 
It  might  properly  be  termed  investment  finance. 
The  principles  which  should  underlie  these  opera- 
tions, however,  are  in  the  process  of  formula- 
tion, and  those  which  have  been  determined 
are  only  incompletely  stated  in  the  books. 
Even  the  methods  of  this  kind  of  finance  have 
had  a  very  limited  description  in  printed  form. 
The  other  large  branch  of  fiscal  affairs  which 
has  to  do  with  financing  circulating  capital  or 
"quick"  assets  (that  is  to  say  commercial 
banking),  has  for  a  much  longer  period  been  a 
subject  for  study  and  writing,  and  however  much 
remains  to  be  done  to  give  it  an  adequate  writ- 
ten treatment,  the  student  in  this  branch  has  a 
comparatively  well  formulated   and  well  des- 

[^1 


cribed  science  and  art.  It  is  the  aim  of  these 
outhnes  to  enable  the  man  seeking  a  knowledge 
of  investment  finance  to  use  existing  books  as 
advantageously  as  possible.  They  present  a 
comprehensive  scheme  of  study  as  far  as  the 
material  is  available.  They  have  been  pre- 
pared with  the  idea  of  bringing  to  his  attention 
existing  material  in  an  orderly  manner  to  de- 
velop the  subject  in  a  systematic  way. 

If  the  man  who  is  undertaking  to  study  the 
subject  is  working  alone,  he  should  purchase  at 
least  several  of  the  books  most  frequently  re- 
ferred to.  If  he  can  get  them  all  so  much  the 
better.  The  headings  and  sub-headings,  the 
brief  suggestive  word  or  two  in  the  outlines, 
indicate  those  matters  in  which  he  should  be 
especially  informed.  The  general  references 
at  the  beginning  of  each  numbered  topic  in- 
dicate sources  of  information  generally  for  those 
matters  suggested  in  the  outHne  under  that 
topic.  Frequently  after  a  heading  or  sub- 
heading of  the  outline  the  student  will  find  a 
special  reference.  This  reference  already  may 
have  been  included  in  one  of  the  general  refer- 
ences at  the  beginning  of  the  topic,  or  it  may 
be  an  entirely  new  reference  selected  from  some- 
book  or  from  some  part  of  a  book  in  which  there 
is  not  a  general  treatment  of  the  entire  topic. 
The  special  reference  may  refer  only  to  the 
single  heading  or  sub-heading  immediately  pre- 
cedmg  it,  or  it  may  include  several  such  head- 
ings or  sub-headings  between  it  and  the  next 
preceding  reference. 

[xi] 


Enough  has  been  said  aheady  to  indicate 
that  these  outHnes  are  for  the  student  rather 
than  for  the  merely  casual  or  even  somewhat 
earnest  reader.  One  who  preferred,  however, 
to  take  a  book  and  read  it  through  consecu- 
tively before  taking  up  another  book  to  read 
in  the  same  way  could  advantageously  use  the 
outHnes  to  test  the  knowledge  he  has  gained 
from  such  reading.  By  looking  through  the 
outline  he  can  see  if  he  is  informed  on  each 
heading,  and  how  fully,  and  if  he  is  not  in- 
formed,   how   he    can    remedy    his    deficiency. 

This  suggests  the  use  of  the  outHnes  by  the 
man  who  has  had  experience  in  this  branch  of 
finance.  It  may  be  a  waste  of  time  for  such  a 
man  to  read  all  the  material  indicated.  Some 
parts  of  the  subject  he  may  know  much  more 
thoroughly  than  any  printed  matter  presents 
it.  Such  a  man  can  go  through  the  outlines 
and  passing  over  that  with  which  he  is  famiHar 
round  out  his  knowledge  by  doing  the  reading 
on  those  topics  on  which  he  is  relatively  unin- 
formed. 

An  investment  banking  house  interested  in 
offering  facilities  for  its  men  to  increase  their 
information  might  at  least  establish  a  little 
office  library  containing  all  the  books  referred 
to,  and  any  of  its  men  so  inclined  could  make 
systematic  use  of  the  books  with  the  assistance 
of  the  outHne.  The  house  may  wish  to  go 
further  and  organize  a  class  for  study  under  the 
guidance  of  one  of  its  more  experienced  men. 
The  leader  of  the  class  in  that  event  will  find  a 

[xiij 


part  of  his  work  done  for  him  through  the 
systematic  arrangement  of  the  subject  presented 
in  the  outline.  The  headings  and  sub-headings 
would  afford  him  constantly  the  suggestion  of 
the  next  matter  to  take  up,  and  lead  him  on 
from  subject  to  subject  in  an  orderly  manner. 
Almost  any  man  of  experience  in  a  given  field  of 
work  can  talk  interestingly  and  instructively 
about  it  if  he  has  the  suggestion  of  some  specific 
subject  out  of  the  general  field. 

University  instructors  will  find  in  the  out- 
lines a  careful  plan  of  courses  of  study  in  the 
subjects  indicated  which  have  been  prepared 
under  the  supervision  of  men  actively  engaged 
in  the  financial  work  the  courses  present.  * 


[xiu] 


OUTLINE  OF  A  COURSE  IN 
CORPORATION  FINANCE 

This  course  assumes  a  general  knowledge  of 
the  nature,  organization,  and  management  of 
corporations.  The  amount  of  information  as- 
sumed is  about  that  conveyed  in  Conyngton, 
"The  Modern  Corporation.'*  It  would  be 
well  to  have  read  also  Pratt's  "Work  of  Wall 
Street,"  revised  edition,  and  Sullivan's  "Amer- 
ican Corporation." 


Full  titles  of  books  referred  to  will  be  found 

in  the  bibliography  at  the  end  of 

the  outline 


DIVISION  I 

INTRODUCTORY  TOPICS 
TOPIC    I 

Corporation  Finance  in  Its  Relation  to  the 

General  Subjects  of  Economics  and 

Accounting 

This  introductory  topic  forms  the  connecting 
link  between  general  economics  and  business 
practice  as  presented  in  this  course.  A  man- 
ager or  other  person  in  charge  of  the  course  can 
utilize  the  first  session,  for  which  the  men  have 
not  had  an  opportunity  for  preparation,  by  giv- 
ing a  lecture  covering  this  introductory  matter. 
The  bond  man  reading  by  himself  could  cover 
the  ground  by  the  references  given.  It  would 
not  be  worth  his  while,  however,  to  delay 
getting  on.  He  had  better  get  ahead  and 
come  back  to  these  general  references  as  he 
has  opportunity.  Some  reference  books  in 
general  economics  are: 

"Elementary  Principles  of  Economics,"  by 
Irving  Fisher. 

"Principles  of  Economics,"  by  Edwin  R.  A. 
Seligman. 

[3] 


'"  Prihciples  ^f.  .£<conomics,"  by  F.  W.  Taus- 
sig. 

The  subject  of  Corporation  Finance  is  closely 
associated  with  the  subjects  of  Accounting  and 
Corporation  Law.  The  student  would  be 
helped  greatly  by  some  knowledge  of  both 
subjects.  As  suggestions  for  texts  in  account- 
ing: 

Cole:  "Accounts,  Their  Construction  and 
Interpretation." 

"Modern  Accounting/'  by  Henry  Rand  Hatj- 
field. 

"Auditing  Theory  and  Practice,"  by  R.  H. 
Montgomery. 

"Net  Worth  and  the  Balance  Sheet,"  by 
Herbert  G.  Stockwell. 

For  a  book  reference  on  the  law  of  the  sub- 
ject, probably  the  most  useful  for  a  student 
would  be: 

Machen:  "Modern  Law  of  Corporations." 

SUBJECT  OF  THE  COURSE 

This  course  discusses  the  financing  of  the 
relatively  fixed  capital  of  private  business  cor- 
porations. 

Capital  is  wealth  used  in  or  useful  for  pro- 
duction. 


CIRCULATING  AND  FIXED  CAPITAL 

Circulating  capital  is  capital  in  the  course  of 
consumption.  This  is  an  economic  term.  The 
approximate  business  term  is  working  capital. 

[4] 


Fixed  capital  is  that  capital  which  is  rela- 
tively permanent. 

ACCOUNTING  IN  RELATION  TO: 

Working  (circulating)  capital. 

Quick  assets. 

Quick  liabilities. 

Loughy  105-130,  502-507. 
Fixed  capital. 

Fixed  assets. 
Permanent  or  long  term  liabilities. 

The  following  balance  sheet  of  a  manufac- 
turing concern  shows  the  accounting  distinc- 
tion between  working  (circulating)  and  fixed 
capital.  The  heavy  type  indicates  the  fixed 
capital  asset  and  the  italics  indicate  the  liabiHty 
items  by  which  they  were  financed.  The  light 
type  indicates  the  circulating  capital  assets  and 
the  Hability  items  by  which  they  were  financed. 

ASSETS 

PLA>rr $5,000,000 

Merchandise  and  material  inventory         .      .  750,000 

Bills  and  accounts  receivable 500,000 

Cash 250,000 

$6,500,000 

LIABILITIES 

Common  Stock $3,000,000 

Preferred  Stock 1,000,000 

Mortgage  Bonds  5% 1,000,000 

Bills  and  accounts  payable 250,000 

Surplus 1,250,000 

$6,500,000 

is] 


THE  INCOME  ACCOUNT  OF  A  MANUFACTURING  CONCERN  IN 
ITS  ECONOMIC  ASPECTS 


Goods  billed 
Cost  of  material 
Maintenance, 
taxes  and 
other  current 
costs  of 

Eroduction 
abor    . 
Cost,   other   than 

cost  of  capital    $2,750,000 
Net  ....  750,000 

Interest  and  Dis- 
count 125,000 
Available  for  Div- 


$3,500,000 
1,250,000 


250,000 
1,250,000 


The  wealth  produced. 
The  working  (circulating) 
capital,  the  raw  material 
increasing  in  value  through 
the  application  of  labor 
with  the  use  of  capital. 
The  share  of  labor  in  the 
product. 


The    share    of 
the  product. 


capital    in 


idends 


$   625,000 


FINANCE  IN  RELATION  TO! 

Working   (circulating)     Capital — is  the  field 
of  Commercial  Banking. 

Fixed  Capital — is  the  field  of  Corporation  Fi- 
nance and  the  subject  of  this  course. 


Question  i.  The  directors  of  a  cotton  mill 
corporation  want  to  borrov^  $200,000,  to 
buy  bales  of  cotton.  Would  you  consider 
that  such  financing  came  under  the  head 
of  Corporation  Finance  as  this  syllabus  has 
indicated  the  subject.'* 

Question  2.  The  directors  of  the  same  cor- 
poration want  to  erect  an  addition  to  the  plant 
that  will  cost  $250,000.     Would  the  provid- 

[6] 


ing  of  funds  for  this  purpose  properly  form 
one  of  the  considerations  of  this  course? 

Question  3.  From  what  sources  could  the  cor- 
poration procure  the  funds  called  for  by  ques- 
tion 2  ? 

Question  4.  How  would  the  transaction  be 
represented  in  each  case  in  the  Balance 
Sheet? 


[7I 


TOPIC  II 

Capitalization  and  the  Investment  Contract 

The    term    "Investment  Contract"  is    used 
to  indicate  the  terms  under  which  an  investor 
commits  his  funds  to  an  enterprise.     The  rights 
and   obHgations   created,   whether   represented 
by  a  share  of  stock,  a  bond  or  other  security, 
constitute  the  Investment  Contract. 
Lyon  I,  1-49. 
Chamberlain,  72-99. 
Mead,  44-59. 

Risk,  Income,  Control,   as  incidents  of  the 
Investment  Contract. 
Lyon  I,  4-14. 

The  Proprietor. 
Lyon  I,  50-53. 

The  Creditor: 
Unsecured. 
Secured. 

The  Investment  Contract  as  to  the  size  of  the 
commitment  (denomination  of  the  security). 


Corporate  securities  as  meeting  the  financial 
ability  of  the  capitaHst  (investor). 
Lyon  I,  lo. 

The    representative   or    fungible    quality    of 
corporate  securities,  i.  e.^  one  share  or  obliga- 
tion of  a  given  issue  just  Hke  another,  facilitat- 
ing market  transactions. 
Emery,  "Speculation  on  the  Stock  and  Produce 

Exchanges   of  the   United    States,"   pp.   38, 

39.  74- 

THE  INVESTMENT  CONTRACT  OF  THE 
STOCKHOLDER 

Common  stock. 
Lyon  I,  12.    ' 
Lough,  70. 

Preferred  stock: 
Cumulative. 
Non-cumulative. 
As  to  Assets. 
Special  agreements. 

Gerstenherg,  54-110. 
Lyon  I  &  II,  15. 
Ripley,  95-100. 
Lough,  71-82. 

Participating  stock. 
Lyon  I,  18. 

Convertible  stock. 
Lyon  I,  20. 

l9] 


Redeemable  stock. 
Lyon  I,   25. 

Some  special  stipulations  of  the  Investment 
Contract  of  Stockholders. 

Non-voting. 
Lyon  I,  28. 

Vetoing. 
Lyon  I,  23-24. 

Conditional  voting. 
Lyon  I,  28. 

Cumulative  voting. 
Lough,  95-99. 

THE  INVESTMENT  CONTRACT  OF  THE  CREDITOR 

The    unsecured    creditor:  Notes    (Financial 
notes    to    be    distinguished    from    commercial 
paper  in  that  they  are  issued  to  finance  rela- 
tively fixed  capital). 
Lyon  I,  184,  bottom. 
Chamberlain,  75. 
Ripley,  164-170. 
Lough,  131-141. 

Debentures. 
Lyon  I,  36-38. 
Ripley,  141. 
Lough,  149-154. 

Equal  security  clause. 
Lyon  II,  218. 

[10] 


The  unsecured  creditor. 
Lyon  I,  74. 

Mortgage  bonds. 
Lyon  I,  36. 

Income  bonds. 
Lyon  I,  39.  ,     • 

Chamberlain,  7S~7^' 
Ripley  y  139. 
Lough,  154-158. 

Convertible  bonds. 

Lyon  I,  43. 

Ripley,  115. 

Gerstenherg,    324-335    (reprint    of   special    cir- 
cular). 

Lough,  158-160. 

Redeemable  bonds. 
Lyon  I,  181. 

Question  i.  How  nearly  like  a  bond  can  a 
share  of  stock  be  made?  Indicate  all  the 
provisions  you  would  put  in  a  stock  certi- 
ficate to  make  it  as  nearly  Hke  a  bond  as 
possible. 
Question  2.  A  corporation  is  capitalized  and 
has  earnings  as  follows: 

^2,000,000     Common  stock. 
^1,000,000    6%  non-cumulative  preferred 
stock. 

Earnings  available  for  dividends,  ^8o,ocx). 

[II] 


What  criticism  of  the  Investment  Contract 
would  you  make  from  the  standpoint  of  the 
preferred  stockholder? 

Question  3.     A  corporation  is  capitalized  and 
has  earnings  as  follows: 

Common  stock  ....  $1,000,000 
Preferred,  6%  cumulative  .  1,000,000 
Debenture  bonds,  5%        .      .       1,000,000 

Net  earnings 210,000 

Assume  that  the  present  investment  in  the 
property  amounts  to  $3,000,000.  The  direc- 
tors are  now  proposing  to  increase  the  investment 
in  the  enterprise  by  selling  at  par  $3,000,000 
of  six  per  cent,  bonds  secured  by  a  mortgage 
on  all  the  property  of  the  company.  Assume 
that  the  corporation  will  earn  at  the  same  rate 
on  the  additional  as  on  the  existing  investment. 
What  effect  will  the  new  bond  issue  have  on 
the  common  and  preferred  stock  and  on  the 
debentures.?  (Work  this  out  specifically  to 
show  the  result  in  figures.) 

Assume  that  subsequently  the  corporation 
cannot  earn  more  than  four  per  cent,  on  the 
total  investment.  What  is  the  result  on  all 
classes  of  securities.?  What  would  the  result 
have  been  if  the  new  bonds  had  not  been  issued? 


[12] 


TOPIC  III 

Capitalization  and  the  Investment  Contract 
The  Investment  Contract  of  a  Mortgage 

FORM   OF    ORDINARY   REAL    ESTATE    MORTGAGE 

Gerstenherg,  176. 

It  is  impossible  to  get  any  knowledge  of  Cor- 
poration Finance  without  a  clear  understand- 
ing of  the  nature  of  a  mortgage  and  the  rela- 
tionships of  the  parties  to  it.  The  compiler 
of  this  syllabus  knows  from  experience  that 
many,  even  most,  young  men  just  beginning  in 
business  (and  some  older  men)  do  not  have  any 
precise  knowledge  of  the  rights  and  liabilities 
involved  in  a  mortgage.  It  is  not  desirable 
that  the  layman  studying  finance  should  seek 
the  kind  of  an  understanding  of  the  field  that 
the  lawyer  needs,  but  he  must  know  the  boun- 
dary points  that  determine  the  outline  of  the 
field.  More  than  any  other  Investment  Con- 
tract, the  mortgage  has  influenced  the  develop- 
ment of  methods  of  Corporation  Finance.  The 
corporate  mortgage  is  only  a  development  from 
the  fundamental  mortgage  principles,  and  a 
study  of  a  simple  mortgage  of  a  single  piece  of 

[13] 


real  estate  by  an  individual  mortgagor  to  an 
individual  mortgagee  is  the  quickest  way  to 
get  at  the  heart  of  the  subject  of  corporate 
mortgage,  mortgage  bonds,  the  rights  of  bond- 
holders, etc. 

A  mortgage  is  a  conveyance  (sometimes 
only  a  pledge)  of  the  title  to  property  to  secure 
the  repayment  of  a  debt.  The  borrower  re- 
tains possession  of  the  property  so  long  as  he 
fulfils  his  obHgation,  and  on  completing  his 
obligation  he  gets  the  title  back.  If  the  bor- 
rower fails  to  meet  his  obligations  the  lender 
may  have  the  property  sold  to  satisfy  his  claim. 

The  Debt — usually  evidenced  by: 
Note  or 
Bond. 

(Difference  between  note  and  bond.  Bond  an 
instrument  under  seal.) 

Effect  of  seal.  The  corporate  seal  as  a  seal 
to  create  a  "sealed  instrument"  and  as  a  means 
of  authenticating  the  corporate  signature. 

Secured  by  Mortgage: 

Mortgagor — the  borrower. 

Mortgagee — the  lender. 

Mortgaged  or  pledged  property. 

Title. 

Possession. 

Covenants   of  the   mortgagor   (what   the 
borrower  agrees  to  do.) 

[I4l 


Defaults    (Failure    of   the    mortgagor    to 
keep  his  agreements). 

Remedies  of  the  mortgagee. 

Release  of  the  mortgage. 

Transfer  of  the  debt : 

(The  lender  sells  the  note  or  bond  to 
another  who  now  becomes  the  credi- 
tor of  the  mortgagee.) 

Assignment  of  the  mortgage: 

(The  lender  selling  the  note  or  bond 
transfers  the  mortgage  claim  against 
the  property  to  the  buyer  of  the  note 
or  bond.) 

The  mortgagor  wants  to  sell  the  property: 
(Sale  may  be  free  from  the  mortgage  in 
which  event  the  mortgagor  must  pay 
the  debt.) 

Sale  subject  to  the  mortgage: 

If  purchaser  does  not  assume  the  mort- 
gage, the  property  remains  liable,  but 
the  purchaser  does  not  become  per- 
sonally liable.  If  purchaser  assumes 
the  mortgage  he  becomes  the  prin- 
cipal debtor,  and  the  seller  remains 
liable  as  guarantor,  unless  released 
by  the  mortgagee. 

Foreclosure  and  sale. 

Deficiency  judgment. 

[IS] 


THE  CORPORATE  MORTGAGE 

To  trustee  for  benefit  of  bondholders. 

Nature  of  a   "trust."     Trustee  holds  legal 
right  but  bondholders  the  beneficial  interest. 

Why  to  a  trustee: 

Otherwise  would  have  to  make  each 
person  lending  funds  one  of  the  mortgagees 
with  difficulties  of  transferring  the  security. 

Question  i.  A  mortgages  his  house  to  B  to 
secure  a  debt  of  $10,000.  A  fails  to  pay  the 
debt  and  B  forecloses.  On  the  foreclosure 
sale  the  house  is  sold  for  $11,000.  Who 
gets  the  extra  $1,000? 

Question  2.  Assume  that  on  the  foreclosure 
sale  the  house  sold  for  only  $9,000.  What 
are  B's  rights? 

Question  3.  A  sells  the  house  to  C  who  takes 
it  subject  to,  and  assumes,  the  mortgage.  A 
does  not,  however,  get  a  release  from  B.  C 
fails  to  pay  the  mortgage.  On  foreclosure 
the  house  sells  for  $8,000.  C  has  only  $1,000 
of  assets.     What  are  B's  rights? 


[i6 


TOPIC  IV 
The  Basis  or  True  Income  Return  of  Bonds 

Chamberlain^  403-415,  426-429. 

The  matter  of  the  basis  or  so-called  true  in- 
come return  on  bonds  often  puzzles  the  beginner. 
It  is  well  for  him  to  become  familiar  early  with 
the  general  principles  involved  so  that  he  may 
readily  grasp  the  ordinary  discussions  of  the 
subject  of  finance  which  assume  a  knowledge 
of  these  concepts.  An  instructor  might  well 
convey  in  a  lecture  all  the  information  re- 
quired for  this  early  preliminary  consideration 
of  the  subject. 

DISCOUNT  BOND 

A  bond  is  an  obligation  carrying  interest. 
It  may,  however,  be  sold  at  a  discount. 
Chamherlain,  407. 

We  have,  therefore,  in  arriving  at  the  real 
amount  paid  or  received  for  the  use  of  money 
in  the  case  of  a  bond  sold  at  less  than  par,  a 
combination  of  the  principles  of  interest  and 
discount,  as: 

[17] 


$looo.     5%  lo-year  bond  at  95. 

Principal  loaned,  ^950. 

Annual  return  received  from  coupons. 

This   (1.  ^.,  $50  return  on  $950)  is 

equivalent  to  an  interest  rate  of  5*26% 

Amount  returned  to  lender  at  end  of 

10  years ^looo.cx) 

But  amount  loaned 950.CO 

Amount  of  discount  for  the  lo-year 

period 50.00 

A  correct  calculation  of  the  annual 
value  of  this  would  show  it  equi- 
valent to  a  per  annum  return  of 
approximately  -^  of  i  per  cent.  ,37% 

5.63% 

It  is  not  necessary  for  the  student  to  go  into 
the  mathematical  principles  of  what  is  vari- 
ously termed  net  yield,  net  return,  or  true  in- 
come return,  comprising  the  annual  value  of 
interest  and  compound  discount,  involved  in 
this  computation  until  he  gets  into  the  course  in 
Investments. 

PREMIUM  BOND 

A  bond  may  also  be  sold  at  a  premium. 

Chamberlain^  409. 

$1000.     5%    bond,    running    for    10 

years  at  the  price  of  105  . 

Prmcipal  loaned $1050.00 

Annual  return  received  from  coupons 

50-00 

This  would  be  a  per  cent,  of  .      .      .  4-7^2 

But  amount  returned  to  lender  at  end 

of  ten  years  is 1000.00 

[18] 


This  is  less  than  the  principal  loaned 

by 50.00 

This  amount  of  principal  has  been  paid 

back  to  the  lender  in  the  period. 
A  correct  mathematical  calculation  of 

the  value  of  this  shows  that  it  is 

equivalent  to  an  annual  per  cent,  of 

approximately  iWo  of  I  %    .  .387 

Which     is     the     computed     annual 

amount  compounded  at  the  basis 

rate  of  4.375  required  to  amortize 

the  premium  leaving  a  net  return 

of  approximately 4-375 

THE  USE  OF  THE  BASIS  BOOKS 

Chamberlain^  426-429. 

Question:  Determine  from  a  basis  book  the 
approximate  yield  of  the  following  bonds: 


PRICE 

95 
85 
98 
los 
103 
95 
97 

lOI 

95 
92 


RATE  OF  INTEREST 

YEARS  TO  RUN 

PER  CENT 

25 

s. 

20 

3t 

12 

4I 

15 

6 

18 

3 

40 

4 

5 

5, 

3 

35 

t' 

50 

4 

1 19) 


DIVISION  II 

CAPITALIZATION  IN  RELATION  TO  INCOME,  ASSETS, 
STATE    CONTROL 

TOPIC    V 

Capitalization  in  Relation  to  the  Income  Ac- 
count, Part  I 

Lyon  I,  50-56. 
Lyon  II,  175-195- 
Chamberlain,  263,  279. 
Lough,  179-189. 

Unless  the  student  is  familiar  with  matters 
of  accounting,  the  instructor  will  need  to  ex- 
plain fully  the  terms  involved  in  the  Income 
Account,  and  the  student  working  by  himself 
will  need  to  feel  that  he  has  a  sound  under- 
standing of  the  Income  Account. 

THE  INCOME  ACCOUNT 

For  Railroads  and  PubHc  Service  Corpora- 
tions. 

Lyon  II,  175-179. 
Gerstenhergy  166. 
Chamberlain,  263-275. 

[21] 


SHORT  FORM 


LONGER  FORM 


Gross  Income- 


Operating- 


Net  Income- 


Fixed  Charges 


Surplus- 


Operating  Revenue: 

(Classified    according   to 
kinds  of  business  carried 
on) 
-Operation  Expense: 

Conducting  operations 
Maintenance 

ENet  Operating  Revenue 
Taxes 
Income  from  other  sources 
Deductions  from  Income 

(Interest  \  J  Also  requirements  for  amor- 
Rentals  )  \  tization    of   discount    and 
of  debt 
Available  for  Dividends 

{Dividends 
Surplus 
Contingent  Liabilities 

Concealing  additions  to  the 
capital  account  through 
maintenance 


Concealing  additions  to  the  capital  account 
through  maintenance. 
Lyon  11,  182. 

Skimping  maintenance. 
Lyon  II,  182. 

Income  account  of  an  industrial  corporation. 
Lyon  II,  186. 
Gerstenherg,  662,  782. 

Shipments  billed. 
Cost  of  shipments: 

Cost  of  materials. 

Cost  of  manufacturing  and  selling. 

[22] 


Maintenance. 
Net  manufacturing  profit. 
Other  income. 
Total  net. 

Interest  and  other  fixed  charges. 
Surplus  for  dividends. 

Question  i.  A  corporation  is  making  gross 
earnings  of  ^756,000,  net  earnings  of  $325,000. 
What  is  the  operating  ratio .? 

Question  2.  A  corporation  is  earning  gross 
$1,845,962.  The  operating  ratio  is  70  per 
cent.  Fixed  charges  are  $225,000.  (a) 
What  amount  is  available  for  dividends.'* 
(b)  By  what  percentage  are  the  earnings  in 
excess  of  fixed  charges  ? 

Question  3.  The  corporation  indicated  in  ques- 
tion 2  has  $1,000,000  6  per  cent,  preferred 
and  $1,000,000  common  stock.  What  per 
cent,  is  it  earning  on  the  common  ? 

Question  4.  A  corporation  has  the  following 
Income  Account : 

Gross ^6,ooo,ocx) 

Operating 4,ooo,ocx3 

Net 2,000,000 

Its  capitalization  is: 

First  mortgage  6  %  bonds       .      .      .       $4,000,000 
General  mortgage  4^%  bonds       .      .         5,000,000 

Debenture  5%  bonds 6,000,000 

Preferred  stock  6% 7,000,000 

Common  stock         10,000,000 

(a)  What  is  the  operating  ratio? 

(b)  What  are  the  fixed  charges? 

(c)  How  much  is  available  for  dividends  on 
the  preferred  stock  ? 

[23I 


(d)  What  percentage  is  that  on  the  pre- 
ferred ? 

(e)  How  many  times  the  amount  required 
for  preferred  dividends  is  it? 

(0  How  much  is  available  for  dividends 
on  the  common  stock? 

(h)  How  much  is  available  for  interest 
on  the  1st  mortgage  6%  bonds?  How 
much  required? 

(i)  How  much  is  available  for  interest  on 
the  general  4!%  bonds?  How  much  re- 
quired? 


IH] 


TOPIC  VI 

Capitalization  in  Relation  to  the  Income 
Account.    Part  II 

Lyon  I,  56-82. 

Relative  liability  of  different  classes  of  busi- 
ness to  variations  in  gross  income. 
Railroads. 

Public  Service  Corporations. 
Industrials. 

Lyon,  56-68. 

Ripley,  ''Railroad  Rates  and  Regulation,"  has 
some  interesting  matter  on  this  subject : 

Tendency  of  operating  ratio  to  increase  on 
declines  in  gross  and  effect  on  net  income. 
Lyon,  56-68. 

Providing  business  capital  by  borrowing. 

Lyon,  50-53. 
Ripley,  105-109. 

Borrowing  limited  by  liability  of  net  earn- 
ings to  fluctuate. 
Lyon,  54. 

[25] 


Earnings  available  for  interest,  and  the  mar- 
gin of  safety. 
Lyoriy  54. 
Chamberlain,  276. 

Question.  The  X.  Y.  corporation  has  a  gross 
income  during  a  prosperous  business  period 
of  $1,000,000.  Its  operating  ratio  is  70  per 
cent.  It  is  subject  to  a  decline  of  20  per 
cent,  in  its  gross  during  a  period  of  depres- 
sion and  to  an  increase  in  the  operating 
ratio  at  the  same  time  of  5  per  cent.  Can  it 
safely  have  a  bond  issue  of  $4,000,000  of 
5%  bonds? 


[26] 


TOPIC  VII 

Capitalization  in  Relation  to  Assets.     Part  I 

Lyon  I,  83-107. 

Ripley y  227-237,  248-255. 

Mead,  145-158. 

Loughy  172-179,  189-200. 

The  issuance  of  securities  for  a  consideradon 
not  really  worth  the  par  of  the  securities. 

Sale  of  bonds  at  a  discount  is  equivalent  to 
borrowing  at  a  higher  interest  rate,  i.  e.y  a 
combined  interest  and  discount  transaction  in- 
volved in  the  borrowing. 

The  issuance  of  stock  when  the  considera- 
tion received  does  not  really  have  a  value  equal 
to  the  par  of  the  stock  called  stock  watering. 

Common  Objections  to  Stock  Watering. 
Lyon  I,  83-85. 

Fraud  on  the  buyer. 

As  a  means  of  concealing  excessive  charges. 

Proper  Purposes  of  Stock  Watering. 
Lyon  I,  86-107. 

[27] 


As  a  means  of  arriving  at  a  bargain — satis- 
fying the  various  interests. 

Special  use  for  this  purpose  in  carrying  out 
underwriting  transactions. 

What  advantages  there  may  be  to  the  cor- 
poration in  financing  with  watered  stock. 

Giving  par  value  to  stock  illogical. 

Stock  without  par  value  the  better  way. 

A  New  York  statute  permits  it  (on  minimum 
paid  in  of  ^5  a  share)   and  Maine,   Delaware. 

(New  York  Stock  Transfer  Tax — especially 
important  because  of  transactions  on  N.  Y. 
Stock  Exchange — Stock  without  par  value 
taxed  2  cents  a  share,  the  same  as  $100  shares.) 

See  also  statutes  of  Virginia,  West  Virginia. 
Lough,  95. 

Question  i.  A  mining  corporation  issues  its 
stock  with  a  par  value  of  ^100.  Its  entire 
capitaHzation  is  $1,000,000  of  common  stock, 
and  $1,000,000  in  cash  was  paid  to  the  cor- 
poration for  this  stock,  and  used  in  the 
purchase  of  the  mine,  equipment  for  work- 
ing capital,  etc.  The  ore  has  been  carefully 
blocked  out,  and  it  is  estimated  that  at  the 
rate  of  working  anticipated  the  ore  will 
last  15  years.  The  mine  is  worked  5  years 
at  the  expected  rate,  and  everything  tends 
to  show  that  the  property  was  just  worth 
the  price  paid  for  it.  What  is  the  value 
of  the  stock  at  the  end  of  5  years? 

[28  1 


Question  2.  Certain  real  estate  with  an  actual 
value  of  $25o,cxx5  and  cash  in  the  amount 
of  $250,000  were  turned  over  to  a  newly  formed 
corporation  for  $750,000  par  value  of  the 
stock  of  the  corporation.  The  corporation 
expended  the  $250,000  in  cash  in  erecting  a 
loft  building.  Now,  ten  years  later,  the 
plot  of  land,  without  considering  the  value 
of  the  building,  has  an  actual  value  of 
$75*0,000.  (a)  What  was  the  original  relation 
of  assets  to  par  value?-  (b)  What  is  the 
relationship  now?  (c)  The  promoters  antic- 
ipated this  increase  in  land  value.  Were 
they  justified   in   capitaHzing   as   they   did? 

Question  3.  The  X.  Y.  corporation  issued  its 
$1,500,000  of  common  stock,  and  received 
for  it  land  worth  $1,000,000  and  $500,000 
in  cash.  Ten  years  later  the  land  was  worth 
only  $500,000.  Other  assets  were  worth 
$500,000.  Should  the  corporation  reduce 
the  amount  of  its  stock  outstanding? 

Question  4.  The  promoters  of  a  corporation 
have  $1,000,000  to  invest  in  the  enterprise. 
They  want  to  keep  control.  The  enterprise, 
however,  requires  $3,000,000  of  capital.  It 
is  of  such  a  character  that  not  more  than 
one-third  of  the  capital  should  be  represented 
by  bonds.  The  promoters  have  options  on 
certain  properties  for  which  they  will  have 
to  pay  $500,000.  Development  will  use  up 
the  rest  of  the  required  funds.  The  pro- 
moters want  their  cash  contribution  repre- 

129J 


sented  by  the  same  kind  of  security  as  the 
cash  contributed  by  any  one  taking  any 
security  except  bonds.  Suggest  a  capitali- 
zation and  distribution  of  securities  that  will 
meet  these  requirements. 


t3ol 


TOPIC  VIII 
Capitalization  in  Relation  to  Assets.     Part  II 

Lyon,  83-107.     (Same  as  previous  topic.) 
Meady  60-74. 

Relation  of  value  of  assets  to  amount  of 
earnings. 

Equity  above  the  mortgage: 

Stipulations  to  keep  the  equity  good; 

Stipulation  for  maintenance  to  keep  the 
value  of  the  assets  unimpaired; 

Stipulation  for  the  reduction  of  the 
debt  (see  special  topic  "Amortization," 
under  topic  XIX). 

The    open    mortgage — authorized    and    un- 
issued bonds: 
Lyon,  113. 
Heft,    69-71,    239-241    (Definition    of   "open'* 

mortgage  not  in  accord  with  accepted  usage.) 
Mead,  65-72.  (Especially  good  treatment  of 
this  topic.) 

How  will  the  future  issuance  affect  the 
equity?     Stipulations  tending  to  maintain  the 

[311 


equity  as  bonds  to  be  issued  only  for  a  certain 
percentage  of  the  value  of  new  assets  or  bonds 
to  be  issued  only  on  the  retirement  of  senior 
bonds. 

Junior  mortgages  placed  after  open  mort- 
gages. Stipulation  in  the  junior  mortgage 
that  no  more  bonds  shall  be  issued  under  the 
open  mortgage. 

Junior  mortgage  placed  after  a  mortgage 
maturing  earlier  than  the  junior  mortgage. 

Hejt,  272. 

Expectation  of  not  having  the  prior  claim 
ahead  of  it  after  the  maturity  date  of  the  prior 
claim. 

Possibility  of  extending  the  maturity  of  the 
prior  debt,  and  stipulations  in  the  junior  mort- 
gage against  it. 

Question:  The  X  Corporation 

Value  of  6%  First  Mortgage 

Assets  Bonds  Issued  and 

Outstanding 

$3,000,000  $1,000,000 

Authorized  and 
Unissued  $1,000,000 

Net  Income: 

Twelve  months  just  past,  $300,000. 

Preceding  twelve  months,  $290,000. 

The  Trustee  is  authorized  to  certify  the  un- 
issued bonds  on  the  following  conditions: 

[32] 


(a)  That  the  earnings  for  each  of  the  two 
preceding  twelve-month  periods  are  at  least 
three  times  the  interest  charge  on  the  bonds 
outstanding  and  those  to  be  issued. 

(b)  That  the  par  of  the  additional  bonds 
is  not  in  excess  of  75  per  cent,  of  the  cost  of 
additional  assets  required  by  the  corporation. 

The  directors  want  to  erect  and  equip  a  new 
building  at  a  cost  of  ^800,000. 

1.  How  many  bonds  can  they  issue  to  reim- 
burse the  cost  of  the  new  assets  ? 

2.  What  percentage  of  the  value  of  the  assets 
is  the  present  mortgage  debt  ? 

3.  What  percentage  of  the  value  of  the  as- 
sets will  the  mortgage  debt  be  when  the  addi- 
tional bonds  are  issued  to  pay  for  the  new 
plant  .f* 

4.  What  percentage  of  the  value  of  the  assets 
would  the  mortgage  debt  be  if  all  the  authorized 
bonds  were  issued  ^ 


[33] 


TOPIC  IX 
Capitalization  in  Relation  to  the  State 

Lyon  I,  220-283. 

Ripley,  281-312  (Very  full  treatment  of  the  sub- 
ject for  railroads.) 

Mead,  75-80. 

Gerstenberg,  3  3  7-3  49.  (New  Jersey  Public  Utili- 
ties Act)  351-357-  (General  principles 
regulating  action  by  the  Public  UtiHty 
Commission  of  New  Jersey  upon  petitions 
asking  approval  of  proposed  issues  of  securi- 
ties.) 

Public  Service  Commissions  and  their  func- 
tions. 
Lyon  I,  240. 

Regulations  of: 
Rates. 
Service. 
Securities. 
Accounts. 
Competition. 

[341 


Public  Service  Commission.    Control  of  Capi- 
talization. 

Certificate  of  public    convenience    and    ne- 
cessity. 

Gerstenberg,  345  (24). 

Capitalization  in  relation  to  valuation. 

Bases  of  valuation. 
Lyon  I,  233-239. 

Investment. 

Replacement. 

Reproduction. 

Authority  and  Determination  of  the  Com- 
mission on : 

The  amount  of  securities  to  be  issued. 

The  purposes  for  which  issued. 

The  terms  on  which  issued. 
Lyon,  I,  248-259. 


l3Sl 


DIVISION  III 

FINANCING  NEW  CAPITAL  ASSETS — ^THE  FINANC- 
ING THROUGH  AND  OF  HOLDING  COMPANIES 
AND  SUBSIDIARIES — COMBINATIONS  AND  MER- 
GERS  INTERCORPORATE        RELATIONSHIPS ^THE 

FINANCING  OF  SPECIAL  ASSETS,  I.  E.,  SUCH  AS 
EQUIPMENT — SPECIAL  USES  OF  THE  COLLATERAL 
TRUST 

TOPIC  X 
Intercorporate  Relationships 

Mead,  255-278. 
Mead,  325-331. 
Mead,  338-347. 
Ripley,  143-147. 

Gerstenherg,  522-554.  (Consolidation  agree- 
ment.) 

Gerstenherg,  590-619.     (Sherman  Act,  Clayton 
Act,  Trade  Commission  Act.) 

Financing  new  capital  assets. 
Meady  255-278. 

Intercorporate  Financial  Relationships:    The 
Collateral  Security. 

[37] 


Authority  of  one  corporation  to  own  stock 
or  other  securities  of  another. 

Limitations  imposed  by  anti-monopoly 
law. 

The  operating  corporation  and  the  holding 
corporation. 

A  corporation  may  be  an  operating  com- 
pany only. 

A  corporation  may  be  a  holding  company, 
only. 

A  corporation  may  be  both  an  operating 
and  a  holding  company. 

Class  of  securities  of  one  corporation  owned 
by  another: 

May  own  stock  alone. 

May  own  bonds  alone. 

May  own  stock  and  bonds. 

Amount  of  securities  of  one  corporation 
owned  by  another  giving  rise  to  various  situa- 
tions : 

May  own  all  the  stock. 

May  own  a  majority  of  the  stock. 

May  own  less  than  a  majority  of  the  stock 
but  enough  to  effect  actual  practical  control. 

May  not  own  enough  to  control. 

May  not  own  all  the  bonds  or  may  own  all 
the  bonds  of  one  issue  when  more  than  one 
issue. 

May  own  only  part  of  bond  issue. 

[38] 


If  corporation  owns  a  controlling  amount 
of  stock  of  another  combination,  or  if  less  than 
a  controlling  amount  but  still  an  important 
minority,  an  intercorporate  relationship  exists; 
if  corporation  owns  an  unimportant  minority, 
merely  an  investment. 

Community  of  interest. 
Ripley^  424. 

Corporation  providing  the  funds  may  use  its 
own  credit  to  sell  its  own  bonds  to  provide  the 
funds.  (It  may  pledge  under  a  trust  deed  the 
stock  or  other  securities  it  receives  of  the 
corporation  to  which  it  is  providing  the  funds. 
This  is  the  collateral  bond.) 

The  collateral  bond. 

Mead,  325-331. 
Ripley,  i^^-HJ,  156. 

If  a  general  obligation  of  the  issuing  corpora- 
tion and  secured  only  by  pledge  of  stock  or 
bonds,  a  pure  collateral  bond. 

Bond  may  be  secured  by  mortgage  on  tan- 
gible property  and  also  by  pledge  of  stocks  or 
bonds. 

An  interesting  problem  on  Consolidation 
may  be  found  in  "Cole's  Accounts,"  pp.  346-51. 


[39] 


TOPIC  XI 

The  Future  Acquired  Property  Mortgage 

Lyon  I,  108-143. 

The  future  acquired  property  mortgage: 

Why  created — demand  of  the  capitaUst 
in  bargaining  over  the  Investment 
Contract. 

Effect  on  future  financing  of  corpora- 
tion whose  assets  covered  by  future 
acquired  property  mortgage. 

Cannot  give  first  Hen  on  new  asset  to 
finance  its  acquisition  unless  bonds  are 
redeemed  through  purchase  or  call. 
Lyon  I,  114. 

Creation  of  new  corporation  to  finance  ac- 
quisition of  new  asset. 
Lyon  I,  120. 

Parent  corporation  provides  funds  to  the 
subsidiary:  takes  stock  and  bonds  of  subsidiary 
(discussed  in  previous  topic). 

Parent  corporation  reimburses  itself  entirely 
or  in  part  by: 

[40] 


(a)  Selling  bonds  of  subsidiary; 

or 

(b)  Guaranteeing  and  selling  bonds  of  sub- 
sidiary (sell  at  a  higher  price  by  reason  of  the 
guaranty) ; 

Lyon  I,  122. 

or 

(c)  Selling  its  own  bonds  secured  by  pledge 
of  bonds  of  subsidiary. 

Lyon  I,  122. 

Since  a  lien*  now  attaches  to  subsidiary,  parent 
corporation  may  acquire  assets  of  subsidiary 
subject  to  the  lien. 

Use  of  the  open  collateral  trust  mortgage  to 
finance  acquisition  of  series  of  new  assets. 
Lyon  I,  124-126. 

Question:  The  X.  corporation  runs  a  little  rail- 
way line  from  Y  to  Z.  It  is  a  narrow-gauge 
road,  and  the  directors  have  decided  that  it 
would  be  profitable  to  convert  it  into  a 
standard-gauge  property  and  lay  heavier 
rails.     This  will  require  about  $1,000,000. 

Present  Capitalization : 
Common  Stock        ....     $2,000,000 
First     mortgage     5%     bonds, 

mortgage  closed  ....       1,000,000 

Net  earnings 135,000 

How  could   the   directors   provide  the   new 

capital .? 

[41] 


TOPIC  XII 

The  Holding  Company:  Financial  Combina- 
tions 

Lyon  II,  196-210. 
Ripley,  412-418;  420-455. 
Meady  348-374. 
Loughy  49-54. 

Holding  company  may  be  pure  holding  com- 
pany, i.  e.y  not  conducting  any  operations  of  its 
own. 
Ripley,  433-455- 

Company  conducting  operations  of  its  own 
may  be  used  as  a  holding  company. 

Acquiring  control  of  subsidiaries  by  swapping 
stock  of  holding  company. 
Lyon  I,  127. 

Acquiring  control  of  subsidiaries  by  purchase 
of  stock. 

Funds  for  purchase  provided  by  sale   of 
holding  company  stock. 
Lyon  I,  127. 

[42] 


Sale  of  holding  company  bonds  unsecured 
by  specific  pledge  of  subsidiary  stock. 

Secured  by  pledge  of  subsidiary  stock. 
Lyon  I,  128. 

Existing  liens  of  subsidiaries. 

Possible  creation  of  new  liens  on  subsidiaries. 

Disadvantage  of  this  to  bondholders  or  pre- 
ferred stockholders  of  holding  company. 
Lyon  II,  203-205. 

Stipulations  against  this  in  the  investment 
contract    of  the    preferred    stockholders    or 
bondholders  of  the  holding  company. 
Lyon  II,  206. 

Pyramiding  for  control  by  use  of  the  holding 
company. 

Ripley,  524-532. 

General    consideration    of    the    income    of 
holding  companies. 
Lyon  II,  196-210. 

Control  through  the  same  stockholders. 
Ripley,  423. 

Combinations  of  Public  Utilities: 

Unity  of  Management. 

Central  Power  Plants. 
Gerstenherg    Materials^    570-582.     (Advantages 
claimed.) 

[43  1 


Combinations  in  industrials. 

Combinations  in  railroads: 

(There  is  a  large  amount  of  material  on  the 
subject  of  trusts.  Most  of  the  argument,  how- 
ever, relates  to  the  economic  and  not  to  the 
financial  aspects  of  combinations  and  is  not 
germane  to  a  course  in  Corporation  Finance.) 

Financial  arrangements  on  dissolutions  of 
solvent  corporations  (z.  e.,  to  comply  with  anti- 
trust legislation). 

Gerstenhergy    iooi-icx)8    (Dupont   Co.    dissolu- 
tion). 


[44] 


TOPIC  XIII 

Financing:  ^  Combination  by  Means  of  the 
Lease;  Special  Financing  of  Union  Terminals; 
Special  Uses  of  the  Collateral  Trust  Agreement 

Lyouy  1 31-136. 
Mead,  375-384. 
Ripley y  418-421. 

Gerstenberg,   556-569   (example  of  a  corporate 
lease). 

The  lease  by  one  corporation  of  the  property 
of  another  corporation: 
Authority  to  lease. 

Why  the  lease  resorted  to : 

Avoids  the  raising  of  capital  to  finance 
the  purchase  of  assets.  An  annual  fixed 
charge  (rental)  instead.  Sometimes  ea- 
sier to  negotiate  than  a  purchase. 

Terms  of  the  lease: 

Maintenance  of  the  leased  property.  Pay- 
ment of  an  amount  of  rental  equal  to  fixed 
charges  and  a  percentage  return  on  the 
stock  of  the  lessor  corporation. 

[45] 


Guarantee  of  interest  and  dividends. 
Lyon  I,  133. 

Position  of  lease  in  receivership. 
Lyon  I,  132;  II,  227. 

FINANCING   OF   UNION    TERMINALS 

Lyon  I,  141-143. 

Terminal  property  owned  by  terminal  cor- 
poration. 

Owning  corporation  leases  property  to  enter- 
ing railroads. 

Rental — an  agreement  to  pay  rent  sufficient 
to  give  a  return  on  capital  investment,  i.e., 
an  amount  equal  to  fixed  charges,  etc. 

REALTY    FINANCING 

Chamberlain,  ^66-272, 
Lyon  I,  139. 

Use  of  the  collateral  trust  to  finance  real 
estate  loans. 

Deposit  of  real  estate  mortgages  and  uni- 
form issue  of  bonds  against  them. 

Federal  Farm  Loan  Banks. 


[46J 


TOPIC  XIV 

Special  Financing  of  the  Purchases  of  Railroad 
Equipment 

Chamberlain,  292-300.     (Full  treatment.) 
Cleveland  and  Powell,  "  Railroad  Finance,"  81-94 
Ripley,  171  (brief). 

Financing  the  purchase  of  railway  equipment 
by  giving  the  lender  a  special  claim  on  the 
equipment: 

The  future   acquired    property   mortgage 
prevents  this  being  done  directly. 

Railroad  makes  contract  with  manufac- 
turers for  equipment;  assigns  contract  to 
third  party  who  makes  conditional  sale  of 
equipment  to  railroad  for  series  of  notes 
(bonds)  of  railroad  with  title  of  equipment 
to  pass  to  railroad  when  all  notes  are  paid. 
Equipment  mortgaged  to  secure  notes. 
Lyon  I,  149;  II,  227. 

Conditional  sale: 

Conditional    sale    and    chattel    mortgage 
recording  acts. 
Special  state  acts. 

[47] 


Equipment  bonds  issued  up  to  per  cent, 
of  cost  of  equipment. 

Railroad  makes  first  cash  payment  of 
difference  between  par  of  the  bonds  author- 
ized and  cost  of  equipment. 

Railroad's  covenant  to  replace  damaged, 
lost,  or  destroyed  equipment,  etc. 

Philadelphia  Plan: 

Equipment  leased  (not  sold  on  conditional 
sale)  to  railroad. 

Leases  deposited  with  trustee  who  issues 
trust  certificates  against  them. 

Tax  exemption  in  Pennsylvania. 

Serial  maturity  of  equipment  securities  and 
depreciation  of  equipment. 


[48] 


TOPIC  XV 
Stock:  Its  Issuance  and  Sale 

Lyon  II,  1-34. 
Meady  91-117. 

Ripley,  268-274.     (Check  up  with  the  reference 
to  Lyon  on  the  legal  requirements.) 

(It  should  be  noted  that  this  is  almost  en- 
tirely a  legal  topic.  Precisely  what  may  be 
done  depends  on  the  law  of  the  particular 
jurisdiction.  This  course  can  discuss  the  sub- 
ject only  in  its  broad  general  outlines) : 

Stock,  authorized,  issued,  outstanding. 
Authorized  issue: 

Classes. 
Issuance  of  stock: 

Subscription  for. 

Part  paid  and  full  paid. 

Payment  for  stock: 

By   money,   services,   or  property  of  the 
value  of  the  par  of  the  stock. 

Valuation  of  property  paid  for  by  stock. 

[49] 


Treasury  stock: 

Difference  between  authorized  and  un- 
issued stock  and  treasury  stock. 

Not  an  asset  of  the  corporation. 

How  stock  is  sold  for  less  than  par: 

Treasury  stock — corporation  may  sell  at 
any  price. 

Stock  dividend:  If  the  corporation  has  a 
surplus  may  declare  it  out  in  a  stock  divi- 
dend and  stockholders  pool  their  holdings 
to  issue  to  the  public.  (For  more  of  this 
see  under  the  **  Readjustment  of  the  Cap- 
ital Account"  topic  XXIX.) 

Stock  without  par  value. 
Lyon  I,  84. 

Rights  of  stockholders  to  new  issues  of  stock: 

Right  to  subscribe  at  par  (or  in  some 
jurisdictions  at  a  price  stated  and  not  to 
be  sold  at  a  lower  price). 

Value  of  rights  to  subscribe. 

Equivalent  to  dilution  of  surplus. 

Underwriting  an  issue  of  stock: 

May  be  sold  to  bankers  or  pubHc  when 
treasury  stock. 

On  issue  of  corporation  not  sold  but  under- 
written. 

[50] 


Increasing  the  amount  of  stock  authorized. 
Decreasing  the  amount  of  outstanding  stock. 
The  issuance  of  stock  on  conversion. 
Ripley y  276. 

Question  i.  A  corporation  has  ^1,000,000  out- 
standing, $2,000,000  authorized  and  un- 
issued stock.  A  capitalist  who  is  famihar 
with  the  affairs  of  the  corporation  offered 
to  buy  500  shares  of  the  authorized  and 
unissued  stock  at  $115  a  share.  The  cor- 
poration wanted  the  money  and  the  price 
was  a  fair  price  for  the  stock.  Could  the 
directors  accept  the  offer? 
Question  2.  The  X  corporation  announces  that 
stockholders  of  record  on  the  ist  of  April 
will  have  the  privilege  of  subscribing  to 
$1,000,000  of  new  stock  of  the  corporation 
at  par. 

{a)  The  corporation  has  stock  issued  and 
outstanding  of  $5,000,000.  A  owns  25  shares 
of  stock.  How  much  of  the  new  stock  will 
he  have  a  right  to  subscribe  for? 

{h)  A  transfers  his  stock  on  the  25th  of 
March  to  B  by  giving  him  a  new  certificate 
made  out  in  the  name  of  B.  Who  has  the 
right  to  subscribe  to  the  new  stock? 

(c)  On  the  2d  of  April  the  stock  of  the 
corporation  is  quoted  at  $125  a  share.  What 
is  the  value  of  the  right  accruing  to  one  share 
of  the  old  stock  ? 

[SI] 


(d)  Assume  that  the  stock  of  the  X  cor- 
poration is  selling  at  $150  at  the  time  of  the 
announcement  of  rights.  What  should  it 
sell  for  when  it  goes  "Ex-rights'*? 


[S2J 


TOPIC  XVI 
Stock:  Its  Form  and  Transfer 

Lyon  I,  166-173. 

The  stock  certificate: 
Face  of  the  certificate. 
Power  of  attorney. 

Power  of  substitution. 
The  certificate  book: 

The  stub. 
Transfer  agent. 
Registrar  of  transfers. 

The  stock  book: 
Holders  of  record. 
Dividends  to  holders  of  record. 
Closing  book  over  dividend  period. 

Good  delivery. 

(Rules  of  Committee  on  Securities,  New 
York  Stock  Exchange.) 

[53] 


Regulations  regarding  transfer. 
Transfer  tax. 
Subscription  receipts. 
Interim  certificates. 


54 1 


TOPIC  XVII 

Bonds:  Their    Issuance   Form   and   Transfer 

Lyon  I,  173-199- 
Meady  299-324. 

Authority  to  issue  bonds: 

Not  limited  by  charter  (ordinarily). 

Special  statutory  limitations  (as  that  debt 
shall  not  exceed  amount  of  stock). 

Borrowing  and  mortgage  authorized  by 
stockholders. 

Certification  and  Issuance: 

Execution  and  authentication  of  bond  by 
signatures  of  officers  and  seal  of  corporation 
and  certification  of  trustee. 

Conditions  under  which  bonds  may  be 
issued  stated  in  the  investment  contract 
(trust  deed  mortgage). 

Bonds  redeemed  after  issuance  are  "dead" 
bonds  and  if  reissued  create  a  diflFerent  debt, 
i.  e.  not  with  the  same  mortgage  lien  as  out- 
standing bonds. 

Iss] 


Hold  by  a  trustee  if  to  be  kept  alive  for 
sinking  fund  or  otherwise. 

Terms  of  the  bond: 
Maturity. 
Denomination. 
Interest  rate. 
Interest  dates. 
Registered  and  coupon: 

Registered  as  to  principal. 

Interchangeable. 
Place  of  payment  (Domicile). 
Payment  in  different  monies. 
Prior  redemption  right. 

Bonds:  Their  transfer: 

Coupon  by  delivery. 

Registered — by  transfer  on  books  of  cor- 
poration. 

Rules  of  transfer. 

Subscription  receipts. 
Interim  certificates. 
Temporary  bonds. 
Definitive  bonds. 


[S6] 


TOPIC  XVIII 

The  Corporate  Mortgage  and  Trust  Deed 

Heft,  56-145- 

Gerstenbergy    183-254.     (Reproduction    of   one 
corporate  mortgage.) 

Recitals : 

Incorporation,  authorization  of  bonds  and 
mortgage,  form  of  bonds,  coupons  and  authen- 
tication. 

Granting  clause: 

Description  of  property  mortgaged  or 
pledged. 

Issuance  of  bonds  (with  execution,  authen- 
tication and  registration  clauses). 

Conditions  under  which  bonds  may  be 
issued: 

Bonds  to  be  issued  immediately. 

Bonds  reserved  for  refunding,  or  for  the 
acquisition  of  additional  assets,  and  condi- 
tions under  which  the  trustee  may  certify 
bonds  for  issuance. 

(571 


Provisions  for  redemption : 

Sinking  fund.     Rights  of  redemption   be- 
fore maturity. 

Covenants  of  the  corporation. 

Agreements  for  maintenance,  insurance,  etc., 
against  the  issuance  of  further  securities  by  sub- 
sidiaries whose  securities  are  pledged.  (In 
case  of  trust  deed  for  debentures,  against  the 
creation  of  prior  claims.)  Covenants  relating 
to  the  control  of  pledged  securities.  Provisions 
for  audits,  dividend  payment,  restrictions,  etc., 
etc.     General  legal  covenants. 

Remedies  of  trustees  and  bondholders,  and 
special  law  clauses: 

Law  covenants  stating  rights   under  the 
mortgage. 

Releases  of  mortgaged  property.  Defining 
the  duties  and  protecting  the  trustee.  Execu- 
tion and  recording  of  the  document. 

The  corporate  mortgage  an  elaborate  invest- 
ment contract. 


[58] 


TOPIC  XIX 
The  Maturity  of  the  Debt 

Lyon  I,  144-165. 

Gerstenherg,  "Syllabus,"  30,  31. 

Mead,  81-90. 

Ripley,  130-132  (brief). 

An  extension  of  the  debt  may  be  had  by 
agreement. 

Chamberlain,  p.  loi,  Par.  293;  p.  Ill,  Par.  340. 
Heft,  327. 

Position  of  junior  lienor  on  extension  of 
debt  with  senior  lien. 

Covenants  in  junior  lien  agreement  that 
senior  lien  debt  will  not  be  extended. 

Refunding: 
The  refunding  mortgage. 

Burden  of  the  debt  {i.  e.,  the  annual  charge, 
against  the  corporation  for  interest  and  sinking 
fund  or  serial  maturity). 
Lyon  I,  152. 

Amortization  of  the  debt: 
Serial  maturity. 

[59] 


Special  sinking  funds. 
Repurchase  of  securities: 

Reserved  right  of  redemption. 

Keeping  bonds  alive  in  the  sinking  fund. 

Tests  of  amortizattion  provisions: 

1.  What    assurance   that    amortization    pro- 
visions will  be  carried  out  ? 

2.  How  will  they  affect  market? 

3.  How  evenly  do  they  distribute  the  burden 
of  the  debt? 

4.  Work  involved  in  carrying  out  provisions. 

5.  Assurance  that  provisions  equal  require- 
ments. 

6.  Cost. 


[60] 


TOPIC  XX 
The  Corporate   Income  and   Its  Disposition 

Lough,  415-434,  465-481.  (A  good  discussion.) 
Lyon  I,  173-208. 
Chamberlain,  263-279. 

Ripley,  238-247.     (On  disposition  of  the  sur- 
plus.) 

Mead,    171-254.     (An    especially    full    discus- 
sion.) 

Gross  income.     Income  from  operation.     In- 
come from  outside  operations  and  other  income. 

Income    from    operations — its    liability    to 
fluctuation. 

Income  from  the  ownership  of  securities — 
character  of  this  income. 

Income  of  the  holding  company: 
Influence  of  Hens  on  the  subsidiaries. 

Cost  of  conducting  operations; 
Efficiency  of  plant. 
Efiiciency  of  management, 
[61] 


Cost  of  maintenance : 

Is  enough  being  expended  to  maintain 
efficiency  of  plant  ? 

Are  net  earnings  being  shown  at  the  ex- 
pense of  maintenance  ? 

Are  expenditures  on  the  capital  account 
being  charged  to  maintenance? 

Taxes — the  taxation  of  corporations. 
Lyoriy  "Principles  of  Taxation,"  113-119. 

Net  earnings  and  fixed  charges. 
Disposition  of  the  surplus  income. 

Policy  of  building  up  a  capital  surplus 
and  its  relation  to  the  maintenance  of  divi- 
dends. 

Gerstenberg,  "Syllabus,"  62. 

Ripley,  238-247. 

Loughy  422-434,  465-481. 

Reserves. 

ZrOWg/l,  422-428. 


162] 


TOPIC  XXI 

Declarations  and  Payments  of  Dividend 

Lough,  425-464. 
Mead,  Chap.  17,  18. 

Directors  declare  dividend: 

Power  of  directors  over  dividend  declara- 
tion. 

To  stockholders  of  record  at  a  certain  date. 

When  paid. 

Closing  of  books  to  make  up  the  record. 

Transfer    of   certificate    while    books    are 
closed — ^who  gets  the  dividend  ? 

Quotations — ex  dividend. 

Extra  dividends:  Special  dividends. 

Stock  dividends: 

(Purpose  treated  more  fully  later  under  read- 
justment of  the  capital  account  topic  XXIX.) 

Distribution  of  surplus: 

(Dilution  of  surplus — lessening  of  surplus 

[63] 


per  share  of  stock  through  subscription 
rights). 

Dividend  warrants. 

Accumulated  dividends  on  cumulative  pre- 
ferred stock. 

May  be  good  business  for  the  common  stock- 
holder to  let  preferred  dividends  accumulate, 
getting  use  of  money  for  nothing. 

Rights    of    preferred    and    common    stock- 
holders in  distribution  of  surplus. 


[64] 


DIVISION  IV 

THE   DISTRIBUTION   OF   SECURITIES 

LyoUy  35-101. 

Me  ad  J  11 8-1 44. 

Lough,  201-228,  291-318. 

TOPIC  XXII 
The  Sale  of  Securities  by  the  Corporation 

Direct  to  the  public. 

Why  not  successful. 

To  its  own  stockholders. 
Lyon  II,  15. 

Underwriting  the  sale. 
Lyon  II,  17. 

To  investment  bankers. 
Lyon  II,  2. 
Lough,  319. 

Selling  to  the  corporation's  own  stockholders. 
Stockholders'  **rights." 

Gerstenherg,  358-366. 
Lough,  298-308. 

[65] 


Selling  to  investment  bankers. 

Appraisals — engineer's  report. 
Gerstenberg,  457-488. 

Audits — expert  accountant's  reports. 

Legal  opinions: 

Title  to  property. 

Legality  of  procedure  for  issuance. 

Sales  at  auction — Public  Service  Corporations. 
Lough,  308-310. 


[66] 


TOPIC  XXIII 
Syndicates:  The  Joint  Account 

Lyon  II,  102-156. 
Loughy  339-353- 

Financing  the  purchase  of  securities  by  the 
investment  banker. 

Cooperation  in  the   purchase   and    sale    of 
securities  • 

For  greater  banking  power. 

For  greater  selling  power. 

Formation  of  the  joint  account. 

The  syndicate  manager. 

Purchase  of  the  securities  by  the  syndicate. 

Members'    contribution   to  price — members' 
capital  and  borrowed  capital. 

Carrying  the  securities: 

Undivided  carrying. 

Divided  carrying. 
The  syndicate  price. 

[671 


Releasing  securities  as  collateral  for  the  loan 
in  order  to  make  deliveries. 

The  take  down  price,  or  price  of  purchase 
by  the  selling  member  from  the  syndicate. 

Effect  in  keeping  profits  undistributed. 

Broker's  commission. 

Members'  selling  commission. 

Territory. 

Advertising. 

Duration  of  the  account. 


[68J 


TOPIC  XXIV 

The  Joint  Account:  Distribution  of  Profits 
and  Losses:  Underwritings 

Lyon  II,  102-156. 
Mead,  159-170. 

Unlimited  (or  undivided)  liability  accounts: 
Distribution  of  profits. 
Distribution  of  unsold  securities  or  of  losses. 

Limited  (or  divided)  liability  accounts : 

Distribution  of  profits  and  of  unsold  secur- 
ities or  of  losses. 

The  underwriting  as  a  form  of  the  syndicate, 
to  be  distinguished  from  the  ise  of  the  term 
as  an  assurance  against  loss  on  a  sale  by  the 
corporation  in  lieu  of  a  purchase  for  which  see 
Topic  XXII. 

The  formation  of  a  second  syndicate  to 
purchase  from  the  first  syndicate  or  original 
purchaser: 

Restricted  and  large  underwriting  groups. 
Application  for  the  underwriting. 
Allotments  of  subscriptions. 
[69I 


TOPIC  XXV 
Work  of  the  Bond  Houses 

Chamberlain:  Work  of  the  Bond  House.     (En- 
tire). 
Lyon  II,  35-101. 
Loughy  319-328. 

Selling  securities  by  the  investment  bankers. 

Organization  of  an  investment  banking 
house. 

Negotiating,  investigating,  statistical,  exe- 
cutive, buying,  selling,  accounting,  and  record 
keeping  departments. 

Work  of  the  statistical  department,  analyses, 
preparation  of  circulars,  etc. 

Work  of  the  cashier's  (accounting)  depart- 
ment: 

Receiving  and  delivering  securities. 
Taking  care  of  loans,   substitutions,   etc. 
Keeping  accounts. 

Work  of  the  selling  organization: 
Mailing  list. 
Circulars. 

[70] 


Work  of  the  securities  salesman: 
Selection  and  training  of  salesmen. 
Territory  and  methods  of  work  of  salesmen. 

Work  of  the  banking  house  in  creating  and 
supporting  a  market 


[71] 


TOPIC  XXVI 

Listing  Securities  On  and  Selling  Them 
Through  the  Stock  Exchange 

Lyon  II,  157-174. 
Chamberlain,  62-68. 

Gerstenbergy  162-170.    (An  application  for  list- 
ing.) 
Lough,  328-338. 

Reasons  for  and  against  listing  an  issue  of 
securities  on  the  stock  exchange. 

Listing  requirements : 

Application  to  committee  on  the  stock  list. 

Expense. 

Location  of  transfer  agent   and   registrar 
of  transfers. 

Mechanical  preparation  of  securities. 

Documents  required. 

Other  information  required. 

Promotions. 

[7^1 


Meady  14-24. 

Gerstenberg,  457-468.  (An  engineer's  report  for  a 

promotion.) 
Gerstenberg,  499-521.  (An  agreement  to  purchase 

assets,  etc.) 


[73] 


DIVISION  V 

THE  CORPORATION  IN  FINANCIAL  DIFFICULTIES, 
RECEIVERSHIPS,  BANKRUPTCIES,  REORGANIZA- 
TIONS, READJUSTMENT  OF  THE  CAPITAL  AC- 
COUNT, RECAPITALIZATION 

TOPIC  XXVII 
Receiverships  and  Reorganizations 

Lyon  II,  220-307. 

Ripley,  371-388. 

Meady  406-426. 

Cleveland  i^ Powell "  Railroad  Finance,"  227-270. 

Lough,  573-592. 

Default  and  application  for  receiver. 

Financial  management  of  property  in  re- 
ceivership. 

Receivers'  certificates. 

Protective  committees : 

Powers. 

Calling  for  deposit  of  securities: 

Depositaries. 

[75] 


Certificates  of  deposit. 
Listing. 

Policy   of  security   holders   with    regards 
depositing. 

Foreclosure  suit. 

Appraisal  and  auditing. 

Books  that  should  receive  special  mention 
in  connection  with  the  subject  of  reorganiza- 
tion are: 

*'  Railroad  Reorganization,"  by  Stuart  Daggett, 
which  is  a  study  of  various  railroad  reor- 
ganizations. 

''Corporate  Promotions  and  Reorganizations," 
by  Arthur  S.  Dewing,  which  is  a  study  of  the 
promotion  and  reorganization  of  various 
mdustrial  enterprises. 

**Some  Legal  Phases  of  Corporate  Financing, 
Reorganization,  and  Regulation,"  by  Stet- 
son, Byrne,  Cravath,  Wickersham,  Mon- 
tague, Coleman,  and  Guthrie,  is  a  book  of 
great  value.  Though  primarily  for  a  lawyer, 
a  man  who  is  studying  the  financial  aspects 
of  these  topics  can  get  much  of  value  from  it. 


76 


TOPIC  XXVIII 
Reorganizations 

Readjustment  of  the  capital  account  recap- 
italization. 

Lyon,  220307.    (Same  as  previous  topic.) 
Heft,  335,  404. 
Ripley,  3 3 8-41 1. 
Mead,  427-460. 
Lough,  593-606. 

The  financial  plan  of  reorganization. 

Filing  reorganization  agreement. 

Giving  depositors   an  opportunity  to  with- 
draw. 

Declaring  plan  operative  or  inoperative. 

Extension  of  time  to  deposit. 

'    Decree  of  foreclosure. 

Upset  price. 

Provision  for  cash  requirements : 

Assessments. 

Sale  of  new  securities. 

[771 


Underwriting  and  purchasing  syndicate. 

Readjustment  of  the  capital  account  recap- 
italization. 

Lyon,  296-307. 

Mead,  365-405. 

Gerstenherg,  "Materials,"  910-934.  (Recapi- 
talization of  Chicago  &  Alton.) 

Gerstenherg,  "Materials/'  935-965.  (Readjust- 
ment of  debt,  Hudson  &  Manhattan  R.R. 
Co.) 

Gerstenherg,  "Materials,"  966-1000.  (Reorgan- 
ization of  B.  &  O.) 

Distribution  of  securities  on  dissolution  under 
Anti-Trust  Act. 
Gerstenherg,  1001-1008.     (Dupont  Powder  Co.) 


[78J 


TOPIC  XXIX 

Promotions 

Lough,  229-290. 

Mead,  14-24. 

Gerstenberg,  457-468,  499-521. 

Cooper,  **  Financing  an  Enterprise." 

Gerstenberg,  "  Syllabus,"  Chapter  XV. 

Requisites  of  a  successful  enterprise. 
Cooper,  27-47. 

A  sound  undertaking. 
Sufficient  capital. 
Efficient  management. 
A  sound  undertaking: 
Investigation. 

(Industrial  enterprise) 
Basis  of  enterprise. 
Title  to  property. 
Cost  of  construction. 
Capacity  and  market. 
[79] 


Environment. 

Conditions  of  operation. 

Lough,  229-240. 
Cooper,  48-65. 

Investigation. 

(Transportation  enterprise) 

Cleveland  ^  Powell,  14-19. 

Basis  of  enterprise: 

Population,  capital,  and  resources. 

Survey  (for  advantageous  operating  and  cost 
of  construction). 

Grades,  curvature,  and  cost  of  right  of  way. 

Charter. 

Investigation : 

(Gas,  electric  lighting,  street  railway.) 

Basis  of  enterprise: 
Population  and  area. 

Cost  of  production  and  market  at  price 
that  will  produce  a  profit. 

Assembling  and  preliminary  financing. 
Lough,  240-249. 

Who  act  as  promoters,  legal  status. 
Lough,  250-264. 

Promoting  combinations. 
Lough,  265-290. 

[80] 


BOOKS  REFERRED  TO  IN  THE  OUTLINE  OF  A 
COURSE  IN  CORPORATION  FINANCE 

Byrne — Some  Legal  Phases  of  Corporate  Financing,  New 
York  Bar  Association  Lectures — Byrne,  Stetson, 
Cravath,  Wickersham,  Montague,  Coleman,  Gu- 
thrie, New  York,  1917,  MacMillan,  ^2.75. 

Chamberlain — The  Principles  of  Bond  Investment.  By- 
Lawrence  Chamberlain,  191 1.  New  York,  Henry 
Holt  &  Company,  ^5.00  net. 

Chamberlain — The  Work  of  the  Bond  House,  New  York, 

1912,  Moody's,  ^i.cxD. 

Cleveland — Railroad  Finance.  By  Frederick  A.  Cleve- 
land and  Frederick  Wilbur  Powell,  New  York, 
D.  Appleton  &  Company,  ^2.75  net;  by  mail, 
^2.95. 

Cole — Accounts,  Their  Construction  and  Interpretation. 
By  William  Morse  Cole,  Professor  of  Accounting, 
Harvard  University.  Revised  edition,  1915.  Bos- 
ton, Houghton  Mifflin  Co.,  $2.50. 

Cooper — Financing  an  Enterprise.  By  Francis  Cooper. 
Fourth  Edition.  191 5.  New  York,  Ronald  Press 
Co.,  $3.00. 

Conyngton — The  Modern  Corporation.  By  Thomas 
Conyn|ton.  A  condensation  of  the  matter  con- 
tained m  the  larger  corporate  works  of  Conyngton. 

1913.  New  York,  Ronald  Press  Co.,  $2.00. 

Conyngton — Corporate  Management.  By  Thomas  Co- 
nyngton.   Covering  the  legal  management  of  cor- 

[81] 


porations  after  they  are  in  operation.  Details  the 
procedure  under  the  charter  and  by-laws,  recording 
the  minutes,  transfer  of  stock,  rights,  powers,  and 
responsibihties  of  stockholders,  directors,  and  offi- 
cers with  forms  for  minutes,  motions,  resolutions, 
reports,  stock  certificates,  etc. — ^Third  edition. 
191 1.     New  York,  Ronald  Press  Co.,  $3.50. 

CoNYNGTON — Corporate  Organization.  By  Thomas  Co- 
nyngton  of  the  New  York  Bar.  A  manual  for  busi- 
ness men  covering  the  legal  features  involved  in 
incorporating  a  business.  Third  edition.  1913. 
New  York,  Ronald  Press  Co.     $4.00. 

Daggett — Railroad  Reorganization.  By  Stuart  Daggett. 
Boston,  Houghton  Mifflin  Co.,  1908.     $2.00. 

Dewing — Corporate  Promotions  and  Reorganizations.  By 
Arthur  S.  Dewing.  Boston,  Houghton  Mifflin 
Co.,  ^2.50. 

Emery — Speculation  on  the  Stock  and  Produce  Exchanges 
in  the  United  States.  By  Henry  C.  Emery.  New 
York.     MacMillan  Co.,  1904.     $2.00.    Paper  $1.50. 

Fisher — Elementary  Principles  of  Economics.  By  Irving 
Fisher,  Professor  of  Political  Economy,  Yale  Uni- 
versity. New  York.  1912.     MacMillan  Co.,  ^2.00. 

Gerstenberg — Materials  of  Corporation  Finance.  By 
Charles  W.  Gerstenberg,  Professor  of  Finance, 
New  York  University,  School  of  Commerce,  Ac- 
counts and  Finance.  New  York,  1915.  Prentice 
Hall,  $5.00. 

Gerstenberg — Syllabus  of  Corporation  Finance.  New 
York,  1915.     Prentice  Hall.     50  cents. 

Heft — Holders  of  Railroad  Bonds  and  Notes,  Their  Rights 
and  Remedies.  By  Louis  Heft.  New  York,  E.  P. 
Dutton  &  Co.,  1916.     ^2.cx). 

Hatfield — Modern  Accounting.  By  Henry  Rand  Hat- 
field, Ph.D.,  Professor  of  Accounting,  University 

[82] 


of  California.     New  York,   D.  Appleton  &  Co., 
$2.00.     By  mail,  ^2.14. 

Lough — Business  Finance.  By  William  H.  Lough.  The 
Ronald  Press,  New  York,  1917,  pp.  631.     ^3.00. 

Lyon — Corporation  Finance.  By  Hastings  Lyon.  Com- 
plete Edition.  1916.  Vols.  I  and  II  bound  to- 
gether.    Boston,  Houghton  Mifflin  Co.,  $3.00. 

Mead — Corporation  Finance.  By  Edward  S.  Mead, 
Ph.D.,  Professor  of  Finance,  University  of  Penn- 
sylvania.    New  York,  D.  Appleton  &  Co.,  $2.25. 

MoNTcbMERY — Auditing  Theory  and  Practice,  By  R. 
H.  Montgomery,  C.  P.  A.  Second  edition.  191 6. 
New  York,  Ronald  Press  Co.,  ^5.00. 

Pratt— rA^  Work  of  Wall  Street.  By  Sereno  S.  Pratt, 
Formerly  Secretary  New  York  Chamber  of  Com- 
merce.    New  York,  D.  Appleton  &  Co.,  ^2.00. 

Ripley — Railroads;  Finance  and  Organization.  By  Wil- 
liam Z.  Ripley.  New  York,  Longmans,  Green  & 
Co.,  1915.     ^3.00. 

Seligman — Principles  of  Economics.  By  Edwin  R.  A. 
Seligman,  Professor  of  Political  Economy,  Colum- 
bia University.  New  York,  Longmans,  Green  & 
Co.,  ^2.50. 

Stockwell — Net  Worth  and  the  Balance  Sheet.  By  Her- 
bert G.  Stockwell,  C.  P.  A.  A  book  for  readers 
who  are  not  accountants,  explaining  the  nature  of 
the  financial  statement  or  business  "balance  sheet"; 
what  it  shows,  how  to  read  it,  and  how  it  is  used 
for  the  guidance  of  business  concerns.  191 2. 
New  York,  Ronald  Press  Co.,  Cloth,  ^i.oo. 

Sullivan — American  Corporations.  By  John  Sullivan, 
Professor  of  Law,  University  of  Pennsylvania. 
New  York,  D.  Appleton  &  Co.,  ^2.25. 

Taussig — Principles  of  Economics,  Bv  F.  W.  Taussig, 
Professor  of  Economics,  Harvard  University.  New 
York,  191 1 .     MacMillan,  2  vols,  each  volume  $2.00. 

1 83] 


OUTLINE  OF  A  COURSE  IN 
INVESTMENT 


Full  titles  of  books  referred  to  will  be  found 

in  the  bibliography  at  the  end  of 

the  outline 


OUTLINE   OF   A   COURSE   IN   INVEST- 
MENT 

THIS  COURSE  ASSUMES  A  KNOWLEDGE  OF  THE  SUB- 
JECT INDICATED  IN  THE  SYLLABUS  OF  A  COURSE 
IN  CORPORATION  FINANCE 

TOPIC    I 

What  is  Investment? 

Chamberlain,  1-13. 
Raymond,  1-4. 

This  first  topic  will  serve  to  connect  the 
course  with  the  general  principles  of  economics, 
and  with  the  preceding  course  in  Corporation 
Finance. 

Use  of  capital  in  production. 

Increasing  importance  of  capital  in  produc- 
tion. 

Theory  of  interest : 
Demand  for  capital. 
Reward  for  saving. 
True  interest. 
Premium  for  risk. 

[87] 


Lyouy  ** Corporation  Finance/'  Part  I,  pp.  224- 

232. 

Commitment  of  capital  with  management. 

Commitment    of    capital    without    manage- 
ment. 

Demand  for  this  increase  with  increasing 
complexity  of  economic  life. 

Commitment   of  capital  with   limitation   of 
risk. 

As  proprietor: 

Corporations — preferred  stock. 
Partnership — special  partnership. 
Individual — rental. 
As  lender: 

Risk,  Income,  Control. 
Lyon,    "Corporation    Finance,*'    Part    I,    pp. 
1-17,  29-30. 

Relationship  of  Investment  and  Speculation. 

Definition  of  investment  for  purposes  of  this 
course. 

An  investment  is: 

1.  A   commitment   of  capital   for   use   in 
production; 

2.  Entrusted   to  the  management   of  an- 
other; 

3.  For  which  the  primary  purpose  of  the 

[88] 


capitalist  in  making  the  commitment  is  to 
receive  income  by  reason  of  the  use  in  pro- 
duction (a  transaction  primarily  for  profit 
due  to  change  in  price  is  not  an  investment 
but  a  speculation,  even  though  the  capital  so 
committed  is  used  in  production) ; 
4.  In  which  the  estimated  risk  for  use  in 
production  is  not  so  great  that  the  premium 
for  risk  is  greater  than  the  true  interest. 
For  purposes  of  this  course  we  will  regard 
land  as  capitalized  and  treat  it  as  capital. 

Apply  this  definition  of  investment  to: 

Real  estate  proprietorship. 
In  use. 
Not  in  use. 

Mortgages. 

Corporate  stock. 

Corporate  bonds. 

Municipal  bonds. 

(Show  how  government  and  municipal 
loans  come  under  the  head  of  commitment 
of  capital  in  production.) 


[89] 


TOPIC  II 
Tests  of  an  Investment 

Chamberlain,  13-62. 
Investment  tests : 

1.  Security  of  principal: 

As  affected  by  management. 
Judgment  in  making  the  original  com- 
mitment. 
Maintenance  of  assets. 

From  the  nature  of  the  business. 
From  the  investment  contract. 

2.  Stability  of  income: 

As  affected  by  management. 
From  the  nature  of  the  business. 
From  the  investment  contract. 

3.  Fair  income  return: 

True  interest  plus  premium  for  risk. 

4.  Marketability. 

5.  Value  as  collateral: 

Depends  on  quickness,  closeness,  and  sta- 
bility of  market. 

6.  Tax  position. 

[90] 


Federal,  state,  and  local. 

7.  Freedom  from  care. 

8.  Acceptable  duration. 

9.  Acceptable  denomination. 
10.  Appreciation. 

The  term  "investment  contract"  will  be 
used  as  expressing  the  obligations  of  the  party 
(government,  municipality,  corporation,  in- 
dividual) to  which  or  whom  the  use  and  man- 
agement of  the  capital  is  entrusted,  and  the 
rights  of  the  investor  who  has  made  the  com- 
mitment of  his  capital. 

Look  up  several  corporations  and  set  down 
the  securities  issued  by  each,  find  the  quotation 
and  compute  the  yield  to  show  the  effect  of  the 
investment  contract,  i.  e.,  as: 

UNION  PACIFIC  PRICE  YIELD 

Common  (8%  div.) 

Preferred  4% 

Convertible  4%,  1927  .  . 
First  and  Ref.  4%,  2008  .  . 
First  and  Land  Grant  4%,  47 

Risk  arising  out  of  the  nature  of  the  business: 
Security  of  principal. 
StabiHty  of  income. 
This    sub-topic,    stability   of  income,    refers 
back  to  the  discussion  of  the  relative  fluctua- 
tions of  income  from  different  businesses  dis- 
cussed in  the  preceding  course  in  Corporation 
Finance.  See  Lyoriy  "Corporation  Finance,"  Part 
I,  pp.  50-82. 

[91] 


147 

S-44 

83 

4.82 

94 

4.70 

91 

4.40 

98 

4.10 

As  to  security  of  principal  apply  test  of  risk 
from  nature  of  the  business  to  several  kinds  of 
business,  as  for  example  to: 

Mail  order  business;  establishing  a  new 
magazine;  owning  and  operating  timberland; 
conducting  an  ostrich  ranch;  making  war 
munitions;  building  railroad  through  new 
country;  flouring  mill;  starting  an  electric 
light  plant. 

As  to  stability  of  income  apply  to  several 
kinds  of  business : 

Making  railway  equipment;  street  rail- 
way; the  lumber  business;  steam  railroad; 
gold  mining;  contracting  business;  grocery 
store. 


[92] 


TOPIC  III 
Government  Bonds 

Raymond,  5-93. 

Only  the  general  knowledge  of  government 
finance  that  any  fairly  well-informed  citizen 
has  is  necessary  for  the  special  study  of  govern- 
ment and  municipal  obligations  as  investments. 
A  more  thorough-going  knowledge  of  public 
finance,  however,  is  desirable.  For  this  sub- 
ject standard  large  works  are: 

BastMe,  C.  F.,  "Public  Finance."  Adams, 
H.  C.  "Science  of  Finance." 

Plehn,  Carl  C,  "Introduction  to  Public  Fi- 
nance," New  York,  is  a  shorter  work. 

Of  Bastable,  especially  pp.  1-220  and  612- 
769  should  be  read  and  of  Plehn,  pp.  1-102, 
366-465  and  corresponding  Topics  in  Adams. 
The  rest  of  these  books  is  a  discussion  of  taxa- 
tion. Though  a  knowledge  of  the  problems  of 
taxations  is  desirable,  it  hardly  has  the  same 
importance  as  a  basis  for  the  study  of  invest- 
ment in  the  pubHc  debt  as  other  and  more 
general  matters  of  public  finance.     For  a  brief 

193] 


simple  discussion  of  taxation,  especially  as  af- 
fecting investments,  see: 

Lyon,  "Principles  of  Taxation,"  Boston.  Hough- 
ton Mifflin  Co. 

This  was  originally  a  report  to  the  Invest- 
ment Bankers  Association. 

General    tests    of    credit    applicable    to    all 
creditors : 

Ability  to  pay. 

Willingness  to  pay. 

m 

Ability  to  pay — depends  on: 
Capital. 
Labor. 

Ability    to    pay    as    applied    to    government 
obHgations  depends  on: 

Natural  resources. 

Productivity: 

Capital. 

Labor. 

Population. 

Number. 

Moral  and  intellectual  quality.     Willingness 
to  pay: 

The  willing  debtor. 

The  unwilling  debtor. 

l94l 


(a)  When  compulsion  cannot  be  brought 
to  bear. 

(b)  When  compulsion  can  be  brought  to 
bear. 

Government  obligations: 

No  compulsion — people  cannot  sue  the  sov- 
ereign. 

Unwillingness  to  pay  due  to  change  in  gov- 
ernment. 

Secured  government  bonds: 

As  on  customs  receipts — but  enforceable 
only  by  consent  or  with  force;  deposit 
of  collateral. 

Ability  to  pay — resources  of  the  country. 

Land — agricultural,  forest,  mineral. 

Labor — numbers,  intelligence,  energy. 

Capital — sufficient  for  extractive  indus- 
try sufficient  for  manufacturing. 

Amount  of  debt  used  unproductively. 

Total    debt    less    debt    used    productively 
equals  true  net  debt. 

National  Debt — paper  money  plus  bonds. 
External  and  internal  loans. 

Look  up  New  York  quotations  on  foreign 
bonds  and  show  how  price  is  affected  by  invest- 
ment contract  as  to  place  of  payment  and  in 

[95] 


general   the   problem   of  foreign   exchange   in 
relation  to  foreign  government. 

Special  foreign  issues: 

British  consols. 

French  rentes. 

Foreign  issues  dealt  in  the  American  mar- 
ket. 

Canadian  securities.    - 


[96 


TOPIC  IV 


United  States  Government  Bonds 


Chamberlain, 

Chamberlain 

ernments.' 


115-122. 
(Appendix), 


A  Gamble  in  Gov- 


If  the  bond  man  studying  this  topic  does  not 
already  have  available  the  following: 

"National  Banking  Act/' 

"  Federal  Reserve  Act." 

**  Postal  Savings  Bank  Act/' 
he   can   procure  them   on   application  to  the 
Bureau  of  Printing,  Washington,  D.  C.     See 
list  of  books  at  the  end  of  this  outline. 

United  States  Government  Bonds: 

HISTORY  OF  DEBT  OF  UNITED  STATES 


Present  United  States  interest  bearing 
30,  1916) 

2%  Consols  1930     . 

3%  Loan  1908-18    .      . 

4%  Loan  1925    . 

2%  Panama  1916 

2%  Panama  after  1918 

3%  Panama  1961 

22%  Postal  savings  31-33 

25%  Postal  savings  1935 

I  97] 


debt  (as  of  June 

$   646,250,150' 

198,992,660 

162,315,400 

54,611,420 

30,000,000 

50,000,000 

5,508,060 

933.540 


To  which  there  has  since  been  added 
3^%  Liberty  Loan  1932-47     .      .      .      2,000,000,000 
4%  Liberty  Loan  1927-42       .      .  3,000,000,000 

(or  more,  as  this  goes  to  press  the  amount  has  not  been 
determined). 

Look  up  current  quotations  on  United  States 
Government  Bonds  and  compute  bases.  (The 
following  are  as  of  August  19,  1916): 


2%  Apr.  1930 

99 

2.10 

4%  Feb.  1925 

no 

2.60 

2%  Panamas  1936 

98-1 

2.10 

3%  Panamas  1961 

IOI-§ 

2.96 

Explain  yield  differences. 

Bonds  available  for  circulation. 
Tax  on  2s  |%. 
Tax  on  old  4s  1%. 
3s  and  new  Liberty  loans  not  available. 

Provisions  of  Federal  Reserve  Act  for  re- 
demption of  United  States  Bonds,  and  for  issue 
of  Reserve  notes. 

Postal  savings  bonds — provisions  of  act. 

Use  of  bonds  to  secure  circulation. 

Freedom  from  taxation. 
''Federal  Reserve  Act"  sees.  111-118. 
''National  Banking  Act,'  sees.  55-70. 


[98] 


TOPIC  V 
State  Bonds 

Chamberlain^  122-158. 

Raymond,  94-139. 

Secrist,  "An  Economic  Analysis  of  Constitu- 
tional Restrictions  upon  Public  Indebted- 
ness In  the  United  States.'* 

Commercial  and  Financial  Chronicle,  State 
and  City  Supplement,  history  of  state  debts. 

Scott,  "Repudiation  of  State  Debts.'' 

This  is  an  entire  book  on  the  subject  which, 

though  out  of  print,  is   available  in  libraries, 

referred  to  for  those  who  want  further  reading. 

For  the  purpose  of  the  course,  the  references  to 

Chamberlain  and  to   Raymond,  pp.   102-128, 

are  ample. 

In   considering   these   defaults   the   political 

situation  at  the  time  of  them  should  be  kept  in 

mind,  and  the  fact  that  the  purchasers  from  the 

state   governments    in    many    cases    knew   the 

political  situation. 

Constitutional  provisions  in  state  constitu- 
tions on  debt. 

Look  up  and  write  out  the  provisions  for 
your  own  state, 

[99] 


A  convenient  reference  is  to  the  Chronicle, 
State  and  City  Supplement. 
Raymond,  p.  130. 

Purposes  of  State  Debt. 

Look  up  and  write  out  the  debt  statement 
of  your  own  state  showing  the  purposes  for 
which  bonds  were  issued. 

State  Credit. 

Look  up  and  make  out  statement  of  quota- 
tion and  compute  basis  for  bonds  of  each  state. 
Chronicle  quotation  supplement. 

New  York — Special  provision  giving  different 
basis  for  different  issues. 

Especially  explain  New  York  quotations. 
(The  quotations  given  represent  prices  in  the 
fall  of  1916). 

Basis 

N.  Y.  3s  I9S9,  99f 3.00 

N.  Y.  4s  1961,  losf 3.7s 

N.  Y.  4s  1963,  ii5f 3.80 

(When  held  as  capital,  surplus,  etc.,  of  sav- 
ings bank,  trust  company,  insurance  com- 
pany, 1%  on  par  of  3s  held  and  |%  on  par  of 
4s  deducted  from  tax.     Tax  law  1903). 

Explain  Virginia  quotations  (the  quota- 
tions given  represent  prices  in  the  fall  of  1916). 

6%  deferred  certfs.  1871  Brown  Bros.  Certfs. 
531  Basis 

3sRiddlebergers  1932, 91^ 3.72 

3s  1991,  83 3.70 

[100] 


Develop    history    and    present   standing   of 
Virginia-West  Virginia  controversy. 
Chamherlairiy  384,  note,  et  seq. 
Raymond,  11 4- 118. 

220  U.  S.  I.  (Supreme  Court  Reports.) 
238  U.  S.  202.  (Supreme  Court  Reports.) 


[lOl] 


TOPIC  VI 
Municipal  Bonds 

Chamberlain,  159-225. 

Raymond,     1 40-1 61.     This    reading    for    two 

topics,  VI  and  VII. 

Write  out  quotations  and  compute  yields 
for  municipal  bonds  of  ten  municipalities,  of 
essentially  different  populations  and  in  dif- 
ferent states.  Chronicle  quotation  supple- 
ment. 

Look  up  quotations  and  yields  in  a  consider- 
able list  of  representative  municipals — large 
and  small  municipalities  and  variously  distrib- 
uted geographically. 

Willingness  to  pay: 

Compulsion  can  be  brought  to  bear. 
New  England — execution. 
Generally — mandamus. 
Classes  of  Municipals: 
County. 
City. 

[102] 


Town. 
Districts: 

School. 

Park. 

Sewer,  etc. 

Levee. 

Drainage. 

Irrigation. 

Why  municipalities  borrow  (long  term)  money : 
To  equalize  burden  of  expenditures.  There 
is  a  theory  that  a  municipality  should  not 
be  in  debt  because  non-productive.  But  the 
debt  may  be  very  essentially  productive. 
The  dollar  the  citizen  does  not  have  to  give 
up  in  taxes  he  can  use  in  his  own  business. 
But  the  way  pubHc  business  is  conducted 
requires  special  restrictions.  It  should  be 
hedged  in  by  conservative  principles  because 
of  the  small  personal  responsibility.  The 
individual  goes  broke  in  his  own  business  if 
he  isn't  sound.  But  if  the  community  is 
unsound  in  its  business  no  particular  in- 
dividual suffers  a  sufficiently  severe  penalty 
to  make  the  penalty  a  sufficient  deterrent. 


[103 


TOPIC  VII 

The   Municipal   Statement   and   Significance 
of  the  Items  in  It 

Reading  as  for  Topic  VI. 

Chamherlairiy  159-225. 
Raymond^  1 40-161. 

Ability  to  pay. 

MUNICIPAL  STATEMENT  CITY  OF  R 

Total  Bonded  Debt  .  .  $20,747,475 

Water  Debt      ....  $8,926,000 
Sinking  fund    ....     1,488,244  10,414,244 

Net  Debt      ....  -^io>333>23i 

Assessed  Valuation 

Real  Estate      .      .      .     $215,285,489  (assessment 

Personal      ....         26,661,470  about    actual 


value) 


$241,946,959 
Tax  Rate  $19.73  P^r  $1,000 
Population  248,465 

Look  up  and  write  out  the  statement  for  one  municip- 
ality.    See  Chronicle,  State  and  City  supplement. 

Nature  of  municipal  assets. 
Revenue-producing  assets. 
[  104] 


Sinking  funds. 
Debt  ratio. 

Assessed  valuations. 

Why  in  this  country  not  generally  up  to 
actual  value? 

The  tax  rate  of  one  municipality  should  be 
read  in  connection  with  the  total  rate  including 
the  county  and  state  rate.  A  rate  may  be 
high,  not  only  because  of  a  low  assessment 
but  because  the  municipality  is  making  im- 
provements out  of  taxes  instead  of  issuing 
bonds,  or  it  may  be  reducing  its  debt  by  meet- 
ing the  maturity  of  bonds  without  refunding. 
Lyon,  **  Principles  of  Taxation,"  92-93. 

Tax  rate. 

Its  relations  to  assessed  valuation. 

Debt  limitations. 

Undoubtedly  the  existence  of  an  absolute 
tax  limit  adversely  and  seriously  affects  the 
credit  of  municipalities  which  are  so  limited. 
The  Ontario  situation  in  which  the  munici- 
pality may  not  create  further  debt  if  the  tax 
rate  exceeds  a  limited  amount  is  a  debt  rather 
than  a  tax  Hmitation. 

Look  up  and  write  out  the  debt  limitation 
for  your  own  state. 


[105] 


TOPIC  VIII 

Ternn  of  Municipal  Bonds;  Sinking  Fund  vs. 

Serial  Maturity;  Savings  Bank  Tests  for 

Municipal  Credit 

Chamberlain,  230,  Sec.  667;  213-220. 
Raymond,  1 42-1 51. 

Term  of  municipal  bonds: 

Massachusetts  method  of  limiting  the 
term  by  statutory  requirement  setting  out 
the  term  permitted  in  accordance  with  the 
probable  life  of  the  improvement  for  which 
issued. 

Canadian  requirement  of  engineers'  cer- 
tificate setting  forth  the  probable  Hfe  of  the 
improvement.  The  by-law  authorizing  the 
bonds  must  limit  their  term  accordingly. 

Serial  maturity  vs.  sinking  fund. 

The  uncertain  value,  as  shown  by  experi- 
ence, of  the  municipal  sinking  fund. 

If  available,  the  special  report  of  the  New 
Hampshire  Tax  Commission  for  191 6  on  Mu- 
nicipal Finances  makes  a  very  clear  statement  of 
the  difficulties  of  the  municipal  sinking  fund. 

[106] 


The  conditions  stated  are  probably  representa- 
tive rather  than  peculiar. 

General  reference  may  be  made  also  to  the 
reports  of  the  New  Jersey  Commission  for  the 
Survey  of  Municipal  Financing  which  may  be 
available  in  the  bond  houses. 

Savings  bank  tests  for  municipal  credit. 

Look  up  the  tests  for  municipal  credit  applied 
by  the  savings  bank  laws  of  New  York,  Massa- 
chusetts, and  Connecticut.  Keep  in  mind  that 
these  represent  very  severe  tests,  and  see  the 
reference  to  these  tests  under  Topic  XXV. 

Select  five  municipalities,  the  population  of 
which  is  up  to  the  requirements  of  the  savings 
bank  investment  law  of  New  York,  Massa- 
chusetts, or  Connecticut,  and  apply  the  tests 
of  one  of  those  laws  to  see  if  the  bonds  of  the 
municipalities  are  legal  savings  bank  invest- 
ments for  that  state.  If  any  of  them  are  not 
indicate  what  test  bars  them  out. 


[107] 


TOPIC  IX 

Authorization,   Issuance,   Sale,   and  Validity 
of  Municipal  Bonds 

Chamberlain,  225-242. 

Authorization  of  Municipal  Bonds. 

State  constitutional  limitations  and  au- 
thority under  legislative  act,  authorizing  and 
prescribing  methods  of  issuance. 

Vote  of  electors  sometimes  required. 

Vote  of  municipal  administrative  body 
(as  city  council)  sometimes  sufficient. 

Municipality  selling  bonds. 

There  follows  a  form  of  request  for  informa- 
tion about  a  proposed  issue  of  bonds  by  a  mu- 
nicipality sent  by  a  bond  house  to  a  municipal- 
ity. 

MUNICIPAL  BOND  STATEMENT 

OF 

BROWN,  JONES  &  CO. 

Amount  to  be  sold Per  cent  ? 

Purpose  of  issue 

Date  and  hour  of  sale Sealed  bids  or  auction  ? 

[108] 


Bonds  to  be  dated 191 

To  mature 


Optional  ? 

Principal  where  payable? 

Interest  payable  when  ? where  ? 

Law  issued  under . 

Denomination  ? 

Are  bonds  tax  exempt .'' where  ^ 

May  bonds  be  registered  as  to  principal,'' interest?.  . 

Any  deposits  required  ? 

Assessed    valuation,    real    and    personal    property,    for 

i^i       , $ 

True  value  (estimated)  taxable  property.  .  .  .$ 

Total  bonded  debt,  including  this  issue $ 

Floating  debt $ 

Amount  of  bonds  outstanding  (included  in  above)   issued 

for  Water  Works,  owned  by  City $ 

Sinking  fund  held  against  Water  Bonds $ 

Sinking  fund  held  against  other  bonds $ 

Population  State  or  U.  S.  Census,  191 

Population  estimated 191 

Private  Sale — sometimes   not   permitted   by 
legislative  act. 

Public  Sale. 

Advertising  for  bids. 

All  or  none  bidders. 

Awarding  the  bonds. 

Bid  price  must  be  par  or  better,  European 
practice  not  so. 

There  is  perhaps  the  beginning  of  a  willing- 
ness with  us  to  permit  municipal  bonds  to  be 

[109] 


sold   at   a   discount.   Minnesota,   for  example, 
permits  it  under  some  circumstances. 
See  Fischer,  "Selling  Over  the  Counter" — In- 
vestment   Bankers   Association   Annual   Re- 
port, 191 3. 

There  is  an  interesting  Dutch  method  by 
which  all  bonds  are  allotted  at  the  lowest  bid 
accepted.  Those  who  bid  higher  than  the 
lowest  bid  are  given  full  allotments  at  the 
lowest  price.  This  seems  equitable.  All  get 
their  bonds  at  one  price  and  one  purchaser 
has  no  advantage  over  another  in  re-selling. 

Reasons  for  holding  municipal  bonds  invalid: 

1.  The  legislative  act  relied  on  held  uncon- 
stitutional. 

2.  Exceeding  limit  of  indebtedness. 

3.  Lack  of  statutory  authority. 

4.  Statutory  requirements  for  proceedings 
not  complied  with. 

Validating  Acts.  (It  should  be  said  in  con- 
nection with  validating  acts  that  they  cannot 
override  constitutional  provisions,  and  that  a 
complicated  procedure  leading  to  delays  in 
opersrtion  may  make  them  something  of  a  nui- 
sance.) 

Georgia  has  a  validating  act. 
Opinion  of  Attorneys  General  as  to  legality, 
Texas  and  Oklahoma. 

[no] 


Certification  of  bonds  for  genuineness  of 
signature  and  as  within  the  limits  authorized. 

Done  by  certain  trust  companies. 

By  state  of  Massachusetts  for  municipal 
notes. 


[Ill] 


TOPIC  X 

General  Considerations  of  Municipal  Credit; 

Municipal  Bonds  and  Taxation;  Special 

Markets   for   Municipals;    Municipal 

Repudiation 

Chamberlain,  173-179,  237. 

Raymond,  152-153,  159. 

Chamberlain,  Sections  699,  704,  705,  707. 

Wrightington  &  Rollins,  "Tax  Exempt  and  Tax- 
able Investment  Securities." 
(At  the  moment  of  writing  out  of  print,  but 

may   be   republished    by   Financial   Publishing 

Co.,  Boston.) 

Municipal  repudiation. 
Chamberlain,  173,  179. 
Raymond,  152-153. 

Examples. 

Causes. 

Results  in  credit. 

General  considerations  of  municipal  credit. 
Chamberlain,  237. 
Raymond,  152-153,  159. 

[112] 


Character  of  population. 

Record  of  good  faith. 

Location,  prosperity,  and  probable  future 
growth  of  the  community. 

Municipal  bonds  and  taxation. 

Chamberlain,  Sections  699,  704,  705,  707. 

Exemption  from  state  and  local  taxation. 

Exemption  from  Federal  income  tax. 

Income  from  municipal  bonds  is  not  subject 
to  either  the  normal  tax  or  the  surtax,  and  does 
not  have  to  be  reported. 

Reasons  for  exemption  from  Federal  income 
tax. 

Federal  government  has  no  constitutional 
right  to  tax  an  agency  of  a  state  government. 

Are  the  municipal  bonds  of  your  own  state 
subject  to  taxation  in  the  state?  Look  up  in 
State  and  City  supplement  in  the  "Chronicle.'* 

Special  markets  for  municipals: 
Savings  banks. 
Trustees. 

Postal  savings  funds. 
Rich  investors  (to  avoid  taxation). 


[113I 


TOPIC  XI 

Tax  Districts;  the  Problems  of  Overlapping 

Debt   Areas;   Special   Assessment   Bonds 

Chamberlain,  pages  243-251,  205-211. 
Chamberlain,  sections  483,  722-726,  532,  576. 

Overlapping  government  areas  and  the  prob- 
lems of  total  debt  against  given  values. 
Chamberlain,  205-211. 

Tax  Districts. 
Chamberlain,  243-251. 

As  a  means  of  escaping  debt  limitations. 

A  special  report  of  the  New  Hampshire  Tax 
Commission  in  1916  on  Municipal  Finances 
presents  a  good  discussion  of  the  general  topic. 

Practice  work — ^Take  a  given  municipal  area, 
as  a  county,  and  compute  the  total  debt  per- 
centage of  the  values,  taking  all  the  debt 
for  which  the  values  are  liable.  Allot  to 
the  area  a  part  of  the  state  debt  in  the  pro- 
portion of  the  state  valuation  to  the  valua- 
tion of  the  area  taken.  State  and  City  sup- 
plement of  the  "Chronicle"  will  furnish  the 
material. 

[114] 


Special  assessment  bonds. 

Chamberlain^  Sections  483,  722-726,  532,  575. 

Reasons  for  issuing  special  assessment 
bonds.  True  special  assessment  bonds — i.  ^., 
which  have  a  claim  only  against  the  abutting 
property. 

Municipal  special  assessment  bonds,  i.  e.., 
bonds  which  are  a  general  obligation  of  the 
municipality,  but  for  which  the  municipality 
holds  the  abutting  property  liable. 

Special  assessment  bonds  are  not  taxed 
under  the  Federal  Income  Tax. 

Practice  work — Examine  the  debt  of  a  muni- 
cipality of  250,000  inhabitants  or  over  and 
make  out  a  list  of  the  various  purposes  for 
which  the  municipality  has  incurred  bonded 
debt.  State  and  City  Supplement,"Chronicle.*' 


l"Sl 


TOPIC  XII 
Buying  and  Selling  Securities 

'You  and  Your  Broker/'  35-58. 

Buying  a  bond: 

The  order — to  salesman  or  by  mail  or  in 
person  over  the  counter. 

Where  delivered — at  bank — but  may  even 
be  brought  around  personally  by  salesman. 

How  delivered: 

Shipped  by  express,  or 

Registered  mail  insured. 

Express  company  an  insurer. 

How  insured  if  mailed. 

Draft  attached: 

(Just  like  the  shipment  of  any  goods  ex- 
cept that  here  the  goods  themselves  are  at- 
tached to  the  draft  instead  of  a  bill  of  lading 
which  it  is  necessary  to  have  in  order  to  get 
delivery  of  the  goods.) 

Computation  of  prices : 

Sold  at  a  price  and  accrued  interest. 

1116] 


Sale  and  transfer  of  bonds. 

Registered. 

Coupon. 

Business  of  safe  deposit  company. 

Inheritance  tax — notice  to  comptroller, 
but  New  York  case,  Appellate  Division,  has 
said  that  securities  in  safe  deposit  box  are 
not  in  custody  of  safe  deposit  company.  The 
practice  of  giving  notice  nevertheless  continues. 


["7l 


TOPIC  XIII 
Real  Estate  Mortgages  as  Investments 

Chamberlaift,  46-61. 

Though  the  bond  man  himself  is  not  dealing 
in  real  estate  mortgages,  they  constitute  a  com- 
petitive investment,  and  he  should  know  some- 
thing about  them. 

The  real  estate  mortgage  as  an  investment. 

Our  land  capital  financed  by  borrowing  just 
the  same  as  any  other  capital. 

Nature  of  a  mortgage  as  security. 

Rights  under — reviewed  by  reading  ordinary 
form  of  mortgage. 
Gerstenberg,  "Materials  of  Corporation  Finance," 

176. 

Form  of  Mortgage : 

Consideration. 

Description  (location). 

Granting  clause. 

Defeasance  clause. 

[118I 


Right  of  sale  on  default  (foreclosure). 
Covenant  to  keep  insured. 

Principal  due  on  default  in  interest. 

Further  assurance — to  execute  any  further 
instruments,  etc. 

Right  of  entry  on  default,  and  to  apply  in- 
come to  payment  of  debt. 

Right  to  receive  on  default. 

Right  of  mortgagee  to  pay  taxes  and  cov- 
enant of  mortgagor  to  repay.  (Usual  provision 
in  New  York  City  mortgages  that  the  mortgage 
becomes  due  on  any  change  in  the  tax  law  af- 
fecting it.) 

Equities — Savings  bank  and  trustee  require- 
ments for  State  and  City  Supplement,  "Chroni- 
cle." 


1 119] 


TOPIC  XIV 
Investing  in  City  Mortgages 

Practical  Real  Estate  Methods,    Read  the  follow- 
ing chapters: 

Mortgage  loans  on  real  estate. 

Margins  on  mortgage  loans. 

Building  loans. 

The  city  mortgage: 

Business  building. 

Dwelling. 

Vacant  lots. 

Appraisals: 

Correct  appraisals  based  on  actual  selling 

price,  not  on  capitalized  earnings. 

Who  makes — reliability  of. 

Buyer  selects  own  appraiser  or  insists  on 
one  he  knows. 

What   proportion   of  value  in   land   and   in 
building  makes  the  best  basis  for  security? 

Rates  of  income. 

[120] 


Application  for  loan. 

Putting  through  transaction. 

Investigation    of    physical    security    dis- 
cussed in  previous  topic. 

Personal  obligor. 

(Generally  not  much  regarded  in  New 
York  but  may  become  important.) 

Title: 

Title  guarantees  in  New  York  and  some 
other  places. 

Fees  for  New  York  County  first  examina- 
tion $65,  plus  ^5  for  each  $1,000,  up  to 
$40,000.     Then  $2.50  a  $1,000. 

Reissue  title  insurance,  New  York  County: 
$32.50,  plus  $5  a  $1,000,  plus  $2.50  per 
$1,000  for  over  $40,000. 

Of  course  these  figures  quoted  by  a  New 
York  cpmpany  for  New  York  County  on  a 
certain  date  are  given  merely  as  an  approximate 
indication  of  this  business. 

Disbursements : 

Title  search  or  insurance. 

Appraisal  fee. 

Survey  fee. 

Recording  tax. 

Drawing  up  documents. 

Brokers  fee  1%  and  up. 

[121] 


Lending  on  new  mortgage: 

Purchase  money. 

New  loan. 

Builder's  mortgage. 

(Advanced  as  building  goes  up.) 
Insurance: 
Taxes  and  tax  liens. 

Taking  mortgage  by  assignment.  (Cove- 
nant that  there  is  due  and  owing  the  stated 
sum.) 

Form  of  Assignment. 

Sale  of  property  subject  to  mortgage. 
(Does  not  release  original  obligor  but  puts 
him  in  the  position  of  guarantor,  but  mort- 
gagee may,  if  he  wishes,  release  original 
obligor. 

Work  of  the  mortgage  broker: 
How  he  finds  borrowers. 
How  he  finds  lenders. 
Who  does  the  work: 

Brokers. 

Mortgage  companies. 

The  real  estate    and    trust    fund    law 
firms. 

The  amortized  mortgage  running  for  longer 
time. 

[122] 


Mortgage  bonds — collateral  mortgages. 

Mortgage  bonds — on  single  buildings. 

The  guaranteed  mortgage,  |%  for  guarantee 
and  care. 

A  form  follows,  showing  elements  to  be 
considered  in  making  a  mortgage  investment. 

APPLICATION    FOR    LOAN    ON    BUSINESS    PROPERTY 

Robert  Jones  applies  to  the  City  Savings  Bank  for  a 
loan  secured  by  first  mortgage  on  property  described  be- 
low: 

First  mortgage — $42,000  at  5%  for  three  years 

Obligation — Robert  Jones 

Location — Worcesterfield,  N.  Y.,  107  Main  Street 

Dimensions  of  lot — 62.3'  x  121  feet 

Dimensions    of    building — 62.3'  x  85    (about) — Stories — 
one  story;  Walls  for  three  stories 

Condition  of  building — Good 

Building  materials — Brick 

Present  use — Stores — all  rented. 

Annual  rent — $5,000. 

Owner's  value  $65,000 

Assessed  value,  1916,  Land  $50,000 

Building  9,000 

$S9,ooo 


[123  ] 


TOPIC  XV 
Farm  Mortgages  and  Land  Bank  Securities 

Robins,  "The  Farm  Mortgage  Handbook." 
The  Federal  Farm  Loan   Act,  64th    Congress, 
1916. 

The  Federal  Government  had  some  interest- 
ing  material   prepared   while   farm   loan   legis- 
lation was  under  consideration,  especially: 
Thompson,  C.  W.,  "Factors  Affecting  Interest 

Rates    and    Other   Charges   on    Short   Time 

Farm  Loans." 
Thompson,  C.  W.,  "Costs  and  Sources  of  Farm 

Mortgage  Loans  in  the  United  States." 

Farm  Mortgages. 

Rural  credits  legislation,  federal  and  state. 

Rates. 

Who  invest  in: 

Insurance  companies. 

Savings  banks  (Vermont). 

Farm  mortgage  association. 

Farm  mortgage  bankers  and  their  meth- 
ods. 

[124] 


The  following  chapter  headings  from  Mr. 
Robins's  book  indicate  the  scope  of  the  subject. 
This  little  book  may  very  profitably  be  read 
through.  It  is  ex-parte,  giving  a  view  of  the 
subject  by  a  dealer  in  the  security,  but  an  ex- 
cellent statement. 

Rural  credits. 

The  negotiation  of  farm  mortgages. 

The  marketing  of  farm  mortgages. 

Investors  in  farm  mortgages  and  the  record 
of  the  farm  mortgage  as  an  investment. 

The  qualities  of  a  farm  mortgage  as  an  invest- 
ment. 

Essential  differences  between  mortgages  on 
farms  and  mortgages  on  urban  real  estate. 


I  "Si 


SECTION  II 

INVESTING  IN  CORPORATION 
SECURITIES 

For    information    about    corporations    and 

their  securities,   constant   reference  should   be 

made  to  such  reference  books  as: 

Poor's  Manuals. 

Corporation  Service  Manual. 

Moody's  Analyses. 

Manual  of  Statistics. 

Commercial  &  Financial  Chronicle,  Weekly  and 
Special  Supplements. 
For  quotations: 

Quotation    Supplement,   Commercial    and 
Financial  Chronicle. 

Quotation    record    in    the    weekly    Com- 
mercial and  Financial  Chronicle. 


[127] 


TOPIC  XVI 

General   Investment  Considerations  of  Cor- 
poration Securities 

Chamberlaifif  69-114. 

Nature  of  business : 

Is  it  a  fixed  capital  or  non-fixed  capital 
business;  i.  e.,  is  the  income  from  the  ser- 
vice or  from  the  product  the  larger  propor- 
tion of  the  return  for  the  use  of  the  fixed 
capital?  If  the  use  of  fixed  capital  plays  a 
relatively  large  part  in  the  cost  of  service  or 
product  probably  the  investment  is  on  a 
sounder  basis,  other  things  being  equal,  than 
if  fixed  capital  plays  a  relatively  small  part. 
Compare  a  railroad  or  hydraulic  electrical 
company  with  a  mercantile  concern  dealing 
in  circulating  capital,  or  a  mail  order  house 
which  has  expended  funds  in  building  up 
good  will. 

Select  a  railroad,  an  electric  lighting  com- 
pany, a  manufacturing  concern,  and  deter- 
mine the  percentage  of  gross  earnings  avail- 
able for  distribution  to  the  various  classes  of 
securities. 

[128] 


The  nature  of  the  business  risk: 

Are  earnings  subject  to  wide  fluctuations? 

Review  the  discussion  of  fluctuations  in 
gross  due  to  the  nature  of  the  business  pre- 
sented  in   the   Corporation    Finance   course 
under  Capitalization  in  Relation  to  Earnings. 
Lyon  I,  50. 

Stability  from  the  nature  of  the  business:  i.  e.^ 
is  it  dependent  on  fashion,  etc.  ? 

Character  of  Management,  etc. 

Evidence  of  Ability,  Integrity. 

Chamberlainy  254. 

Location  of  Business: 

Is  the  location  advantageous  for  the  busi- 
ness to  be  carried  on — location  of  manu- 
facturing plant  with  reference  to  raw  ma- 
terials and  market — location  of  railway  or 
street  railway  with  reference  to  sources  of 
traffic? 
Chamberlain,  320-327. 

The  Investment  Contract: 

Claim  it  gives  on  income. 

Claim  it  gives  on  assets. 

Where  would  the  investment  stand  in 

the  event  of  insolvency  and  a  sale  of  assets  r 

(These  two  headings  of  course  cover  a  very 

large  part  of  the  whole  subject  of  Corporation 

Finance   and   Investment   in   Corporation   Se- 

[129I 


curities.  By  way  of  review  of  topic,  Heft, 
"Holders  of  Railroad  Bonds  and  Notes,"  pp. 
227-334,  could  be  read.) 

Effect  of  the  Investment  Contract  as  shown 
in  yield  of  different  securities  of  the  same  cor- 
poration. 

This  variation  of  yield  in  accordance  with 
the  investment  contract  was  suggested  in 
the  earher  Topic  No.  IX.  Since,  however, 
it  is  a  large  part  of  the  basis  of  investment  in 
corporate  securities,  it  needs  to  be  taken  up 
again  at  this  point. 

Work  out  the  corresponding  showing  for  the 
securities  of  several  corporations,  as  say,  the 
Union  Pacific,  United  States  Steel,  Interborough 
Rapid  Transit,  or  any  that  are  locally  more 
interesting. 


I130I 


TOPIC  XVII 
Stock  as  an  Investment 

Chamberlain,  Chap.  IV,  pp.  29-37. 

"Stocks  and  the  Stock  Market,"  annals  of  the 
American  Academy  of  Political  and  Social 
Science,  contains  articles  on  investment  in 
the  stock  of  corporations  engaged  in  various 
kinds  of  enterprises. 

Element  of  potential  appreciation. 

Combination  of  anticipated  profit  with  ex- 
pected income.  A  combination  of  specula- 
tion and  investment.  See  definition  of  in- 
vestment under  Topic  No.  I. 

Element  of  risk. 

Price  in  relation  to: 
Dividends. 

Earnings  available  for  dividends. 
Surplus. 
(For  a  general  discussion  of  the  relation  of 
the  stockholder  to  corporate  income  see  LyoUy 
"Corporation  Finance,"  Part  II,  17-34,  ^75" 
195) 


Look  up  the  price  and  yield  of  a  common 
stock  in  each  of  these  classes:  Of  a  corporation 
distributing  as  dividends  neariy  all  its  income 
available  for  dividends;  of  a  corporation  not 
paying  any  dividends  in  relation  to  earnings 
available  for  dividends;  of  a  corporation  pay- 
ing in  dividends  only  part  of  the  earnings 
available  for  that  purpose,  and  present  the 
results  in  the  following  form : 


NAME  OF 

PRICE  OF 

PER  CENT. 

PER  CENT.  OF 

CORPORATION 

STOCK 

PAID  IN 

NET        EARN- 

DIVIDENDS 

INGS         CON- 

SUMED         IN 

FIXED 

CHARGES 

PER  CENT.  EARNED 

PER  CENT.  OF 

INCOME  RETURN 

AVAILABLE  FOR 

ACCUMULATED 

TO  THE   PUR- 

DIVIDENDS 

SURPLUS  ON  THE 

CHASER 

STOCK 

Preferred  stock. 

Report  in  the  same  form  as  above  on  three 
preferred  stocks  paying  the  full  preferred  divi- 
dends. 

Report  in  the  same  general  form  on  a  pre- 
ferred stock  which  is  cumulative  and  not  pay- 
ing dividends,  indicating  the  amount  of  accumu- 
lated dividends. 


The  value  of  stock  in  relation  to  the  per- 
centage of  net  earnings  consumed  in  fixed 
charges. 

[132] 


Select  the  stock  of  three  corporations  as 
nearly  alike  as  you  can  find  in  other  respects 
indicated  in  the  report  form  just  given,  but 
differing  in  the  per  cent,  of  net  consumed  in 
fixed  charges,  and  compare  prices. 


1 133] 


TOPIC  XVIII 

Bonds  as  an  Investment,  and  Further  General 

Investment    Principles;    Assets,    Their 

Maintenance,  Increase,  or  Decrease 

Report  of  the  Public  Service  Corporation 
Committee  of  the  Investment  Bankers  Asso- 
ciation for  191 6. 

C  h  amber  lain  f  263-291. 

General  principles  of  the  relationship  of 
gross,  net,  and  fixed  charges  from  the  viev^point 
of  investment  values. 

Ratio  of  net  to  fixed  charges: 

If  taken  alone  might  be  larger  by  reason 
of  skimped  maintenance  and  not  permanently 
maintainable. 

Ratio  of  gross  to  fixed  charges: 

If  taken  alone  a  corporation  having  a  large 
true  operating  ratio  (i.  e.,  one  in  which  the 
capital  account  is  not  being  added  to  through 
the  appearance  of  maintenance)  might  show 
a  large  ratio  of  gross  to  fixed  charges  with- 
out having  a  margin  of  safety  of  net  earnings 
above  fixed  charges. 

[134] 


Combined  ratios  of  gross  and  net  to  fixed 
charges  may  be  used  as  a  test  of  sufficient  main- 
tenance and  a  sufficient  margin  of  safety. 

Debt  in  relation  to  assets: 

Equities  in  relation  to  value  of  assets  re- 
garded as  sufficient  margins  of  safety  in 
assets. 

Public  service  corporations. 

Railroads  (debt  per  mile). 

Manufacturing  concerns. 

The  mortgage  (Trust  Deed  or  other  invest- 
ment contract)  open  or  closed.  If  open  does 
it  contain  sufficient  safeguards  to  protect  the 
investor's  equity? 

Blanket  or  not : 

If  not  a  blanket  mortgage  what  is  the 
relative  importance  of  the  property  covered 
and  its  proportion  to  the  whole  .f* 

First  mortgage  bonds. 

Junior  bonds. 

Refunding  bonds. 

Underlying  bonds. 

What  could  happen  on  default  and  in  fore- 
closure? 

Possible  prior  liens  of  receiver's  certificates. 
Other  possible  prior  claims. 

[135I 


Hejt^  "Holders  of  Railroad  Bonds  and  Notes," 

227-234. 

Apply  the  tests  of  the  ratios  of  gross  and  net 
to  fixed  charges  to  two  railroads,  two  public 
utilities,  and  two  manufacturing  concerns. 

Importance  of  maintenance  account. 

A  determination  of  the  proper  per  cent,  of 
earnings  on  investment  for  adequate  main- 
tenance is  primarily  an  engineer's  problem. 
Very  little  general  information  is  available. 
There  is  a  considerable  body  of  information 
for  railroads  and  there  is  beginning  to  be  in- 
formation for  pubHc  utilities.  But  here  is 
an  open  and  good  field  for  financial  study  in 
investigating  the  amounts  actually  expended 
in  maintenance  for  diflFerent  classes  of  enter- 
prises, and  in  tracing  the  result  in  the  show- 
ing for  the  properties  to  see  whether  an  in- 
creasing cost  of  operation  indicates  a  de- 
creasingly  efficient  plant.  It  is  to  be  hoped 
that  students  of  finance  will  work  on  these 
problems  and  that  we  shall  have  a  growing 
body  of  information.  The  discussions  under 
this  topic  consider  only  general  principles. 

Maintenance  account: 

Are  assets  maintained  through  this  ac- 
count ^. 

Are  assets  decreasing  because  of  insuffi- 
ciency of  this  account  (milking  the  property)  ? 

Are   assets   increasing  through   an   excess 

[136] 


maintenance   account    (fattening   the   prop- 
erty) ? 

Take  two  railroads  and  work  out  the  per 
cent,  of  gross  expended  in  maintenance  back 
for  a  period  of  five  or  more  years. 

Surplus  account: 

Are  assets  from  which  future  earnings  are 
to  be  made  being  increased  through  a  sur- 
plus account? 


[137] 


TOPIC  XIX 

Railroad  Securities — Investment  Consider- 
ations 

Chamberlain,  252-262. 

Chamberlain,  263-292.  ''Previously  assigned  un- 
der topic  XVII.) 

Chamberlain,  292-313. 

Moody,  "How  to  Analyze  Railroad  Reports, 
4th  Edition,"'  1916.  New  York,  Moody's 
Investors  Service. 

Brinton,  Willard  C,  Chapter  XV  on  "Cor- 
poration Financial  Reports  in  Graphic  Meth- 
ods for  Presenting  Facts,"  New  York, 
1 914.  Engineering  Magazine  contains  some 
interesting  comment  on  analyses  of  financial 
reports. 

Reducing  statistics  to  mileage  basis  for  pur- 
pose of  comparison. 
Moody,  "How  to  Analyze  Railroad  Reports." 

Debt  per  mile — ^total  and  for  each  lien. 

Income  per  mile. 

Tests  for  efficiency  of  operation. 

[138I 


Combination  of: 

Efficiency  of  plant. 

Efficiency  of  management. 
Efficiency  of  plant: 

Track — single  or  multiple. 

Curvature. 

Gradient. 
Territory  served: 

Density  of  traffic  statistics. 
Character  of  traffic: 

Low  grade  or  high  grade  freight. 

Diversification  of  traffic. 
Efficiency  of  operation : 

Ratio  of  cost  of  conducting  operations. 

Ten  miles  per  train  mile. 

Property  covered   by  lien   (relative  import- 
ance to  system) : 

Main  Hne  track. 

Terminal  entrance. 

Bridges. 

Branch  lines. 

EQUIPMENT  BONDS 

Chamberlain^  192-214. 

Character  of  equipment  on  which  bonds  are 
secured. 

[139] 


Term  and  amortization — standard — i.  ^.,  equal 
serial  not  running  for  more  than  ten  years. 

Amount  of  equity  provided  by  first  payment. 

Report  on  the  terms  of  an  equipment  issue. 
Look  up  in  the  manuals  a  road  which  has  an 
equipment  issue  outstanding  and  from  the 
probable  date  of  its  issuance  look  up  its  terms 
in  the  Chronicle  by  going  back  to  the  number 
of  the  Chronicle  of  that  date. 

TERMINAL  BONDS 

Chamberlain,  93. 

Lyouy  ** Corporation  Finance,"  Part  I,  140143. 

How  many  and  what  railroads  use  the  ter- 
minal? 

Operating  agreement. 

Providing  for  the  capital  charge  of  terminal 
through  an  operating  agreement,  and  not  be- 
coming directly  joint  obligor  on  the  bonds, 
makes  it  unnecessary  to  show  the  cost  of  the 
terminal  as  a  liability.  This  practice  increases 
the  operating  cost  but  decreases  the  capital 
charge  on  which  to  show  earnings. 

Look  up  the  operating  agreement  and  terms 
of  some  union  terminal. 


[140] 


TOPIC  XX 

Investment  Problems  Involved  in  the  Holding 
Company 

Lyon,  "Corporation  Finance,"  Part  II,  196-208. 
(This  is  a  review  of  an  assignment  in  Cor- 
poration Finance  Course.) 

and 
Classes  of  Public  Utilities.     Public  Service 
Commissions  and  Investment. 

Securities  of  a  holding  company,  and  the 
value  of  "other  income"  {i.  e.-,  income  derived 
from  the  ownership  of  the  securities  of  other 
corporations)  as  earnings  available  for  charges 
or  dividends. 

Collateral  bonds,  or  holding  company 
securities. 

Pledge  of  stock  and  agreement  not  to  in- 
crease the  debt  of  the  subsidiary.  If  such  an 
agreement  exists  the  holding  company  bonds 
have  the  effect  of  a  fixed  claim  junior  to 
the  bonds  of  the  subsidiary  on  the  tangible 
assets  from  which  the  gross  income  is  de- 
rived. 


Percentage  of  gross  of  subsidiaries  con- 
sumed in  charge  of  subsidiaries  before  earn- 
ings of  subsidiaries  are  available  to  pay 
charges  of  holding  company. 

Take  an  example  of  a  holding  company,  for 
which  the  information  is  available,  and  work 
out  the  per  cent,  of  total  gross  and  net  of 
subsidiaries  consumed  in  fixed  charges  of  sub- 
sidiaries and  the  per  cent,  consumed  in  the 
fixed  charges  of  the  holding  company. 

Bonds  of  subsidiaries: 

Investment  problem  is  the  same  generally 
as  for  a  separate  corporation. 

But  possibility  of  building  up  some  sub- 
sidiaries at  the  expense  of  others  and  squeez- 
ing the  bond  holder  of  a  particular  subsi- 
diary. 

Securities  of  a  lessor  corporation: 

Power  of  receiver  to  cut  off  the  lease. 

Is  the  lease  under  such  conditions  for  a 
long  enough  term  to  remove  the  desirability 
of  lessee  milking  assets  of  lessor  .f^ 

Direct  and  assumed  obligations. 

Guaranteed  obligations. 

Guaranteed  by  endorsement  and  otherwise. 

PUBLIC  SERVICE  CORPORATIONS 

Classes  of  public  utility  corporations: 
Street  railways. 

[142] 


Urban. 

Interurban. 

Electric. 

Light. 

Power. 

Hydraulic  Electrical. 
Gas. 

Natural. 

Artificial. 
Telephone. 
Telegraph. 
Water. 

PUBLIC  SERVICE   COMMISSIONS  AND   INVESTMENT 

Policy  as  to  allowance  of  rates  for  income 
return,  valuation  of  property,  etc. 

Policy  as  to  competition  (Certificate  of  pub- 
lic convenience  and  necessity). 

Policy  as  to  regulation  of  capitalization. 

The  natural  monopoly  idea  applied  to  public 
service  companies. 


[143 


TOPIC  XXI 

Investment  Considerations  of  Street  Railway, 
Gas,  Electric  Light,  and  Power  Companies 

Chamberlain  320-349,  357-365. 

Interurban. 

"Electric  Railway  Bonds  as  Investments, 
Bonds  as  Investment  Securities."  Annals  Amer- 
ican Academy  of  Political  and  Social  Science. 

Street  railway  securities: 

Urban. 

Interurban. 

Competition  with  steam  railways. 

Union  of  steam  and  electric  railways. 

Gas  company  securities : 

Relatively  long  history. 

Competition  with  oil  and  electric  light. 

Electric  light  securities. 

Power  company  securities. 

Climatic  conditions — rainfall : 

Minimum  power. 

[144] 


Minimum  power  for  ten  months',  etc., 
period. 

Drainage  area. 

Head. 

Cost  per  horsepower. 

Market  for  power. 

Amount  of  power  marketable. 

Price  per  horsepower. 

Compare  the  quotations  on  the  securities  of 
street  railway,  gas,  electric  light,  and  power 
companies.  Select  for  comparison  one  com- 
pany of  each  class,  and  select  companies  which 
as  near  as  may  be  have  about  the  same  earn- 
ings and  the  same  proportionate  fixed  charges. 


lHS\ 


TOPIC  XXII 

Investment  Considerations  of  Street  Railway, 
Gas,  Electric  Light,  and  Power  Companies 

Chamberlain,  3i4-3i9>  373^3^3^  384-404- 

TELEGRAPH  AND  TELEPHONE  SECURITIES 

Telegraph  companies. 

Telephone  companies. 

The    "Beir*    companies;  The    American 
Telegraph  and  Telephone  Company  and  its 
securities,  and  the  securities  of  subsidiaries. 
The  "Independent"  companies. 

Importance  of  a  telephone  "area." 
Toll  service. 

STEAMSHIP  SECURITIES 

Chamberlain,  314-319. 

Blanket  mortgage  steamship  bonds. 
Great  Lakes — single  boat  bonds. 
Importance  of  insurance. 

TIMBERLAND  SECURITIES 

Chamberlain,  375-383. 

[146] 


Form — Ten-year  series. 

Sinking  fund : 

Effect  of  period  of  poor  demand  for 
timber  on  the  bonds,  considering  the  ex- 
pectation of  meeting  the  maturity  from  the 
proceeds  of  the  annual  cut. 

Estimate  of  values. 

The  work  of  the  "timber  cruiser." 

The  fire  hazard. 

Southern  timberland. 

Pacific  Coast  timberland. 

RECLAMATION  SECURITIES 

Chamberlain,  384-404. 

"Reports,  Committee  of  Investment  Bankers 
Association  in  Annual  Reports  of  Associa- 
tion." 

Irrigation  District  Bonds. 

Private  Project  and  Carey  Act  Bonds. 

Drainage  and  Levee  Bonds. 


[1471 


TOPIC  XXIII 
Industrial  Securities 

The  comparative  average  meagreness  of  in- 
dustrial reports,  and  the  wider  variety  of  con- 
siderations make  the  industrial  a  vaguer  topic 
for  study  than  railroads.  Since  the  amount  of 
discussion  in  print  of  the  general  problems  of 
investment  in  industrials  is  meagre  it  is  not 
possible  to  present  an  extensive  outline  for 
study  of  that  topic. 

Collver,  **How  to  Analyze  Industrial  Securi- 
ties." 
Dezvingy  "Corporate  Promotions  and  Reorgani- 
zations." (This  is,  for  industrials,  somewhat 
in  the  nature  of  a  companion  book  to  Dag- 
gett on  "Railroad  Reorganizations.") 

Industrial  Reports. 
Collvery  1-8. 

Industrials  compared  with  railroads. 
Collver,  g-i2. 

What  is  included  in  the  term  Industrials: 
Collvefy  13-16. 

[148] 


Manufacturing. 
Merchandising. 
Not  mining. 
Large  and  small  scale  business. 
CoUver,  17-20. 

Business  considerations: 

Fluctuation  in  demand  for  product. 

Diversification  of  product. 

Integration  of  product,  {.  e.,  from  raw  ma- 
terial to  user  of  final  product. 

Standardization  of  product. 

Advantages  of  location. 

Competition. 

Colher,  21-45. 

Questions  of  management. 
C Oliver y  47-68. 

Financial  connections. 

Interpreting  the  balance  sheet  of  an  indus- 
trial: 

Lack  of  uniformity. 

Certificate  of  public  accountants. 

Good  will. 

Patents,  trademarks,  brands,  rights. 

Current  assets. 

[149] 


Current  liabilities. 
Surplus. 
Collvefy  69-164. 

Interpreting  the  income   account  of  an  in- 
dustrial. 

The  income  account  and  importance  of  con- 
sistency in  form. 

New  enterprises. 
Collver,  189-204. 

Elements  of  risk  and  safety  due  to  the  nature 
of  a  particular  kind  of  business. 

Elements  of  risk  due  to  competitive  nature 
of  the  business. 

Value  of  fixed  assets. 

Value  of  quick  assets. 

Stipulations  for  maintaining  quick  assets. 


[ISO] 


TOPIC  XXIV 
Mathematics  of  Investment 

Chamberlain,  405-425. 

Sprague    (Perrine),   **  Accountancy   of    Invest- 
ment." 

The  life  tenant  and  the  remainderman. 

Income  to  the  Ufe  tenant,  principal  to  the 
remainderman. 

Principal  and  income. 

What  is  principal  and  what  income? 

Stock  dividends. 

A  very  good  discussion  of  the  stock  dividend 
from  this  standpoint  sufficient  for  the  purposes 
of  the  course  may  be  found  in  Montgomery, 
'^Income  Tax  Procedure,"  87-89.  The  bond 
man  should,  if  possible,  determine  the  situation 
in  his  ov^n  state.  This,  hov^ever,  is  difficult, 
as  there  is  no  general  treatise  to  which  he  can 
be  referred. 

The  student  should  have  a  clear  understand- 
ing of  the  following  subjects,   and  he  might 

[  151  1 


well  be  able  to  work  out  the  mathematical  for- 
mulae. He  should  understand  their  bearing 
on  the  matter  of  basis  or  true  income  return. 

Simple  and  compound  interest. 

The  value  or  amount  of  a  dollar  at  a  given 
rate  of  interest  for  a  given  number  of  interest 
periods. 

The  amount  of  compound  interest  for  a 
number  of  interest  periods  at  a  given  rate  of 
interest. 

The  present  worth  of  a  dollar  at  a  given  rate 
of  interest  for  a  given  number  of  interest 
periods. 

Simple  and  compound  discount. 

Annuities. 

Amount  of  annuity. 

Present  worth  of  an  annuity. 

Rent  of  an  annuity. 


[iS2l 


TOPIC  XXV 

A.  Investments  of  Trustees 

B.  Investments  of  Savings  Banks 

(See  State  and  City  Supplement  of  the  Com- 
mercial &  Financial  Chronicle  for  laws  gov- 
erning trustee  investment  in  many  states.) 
Loring,  "Trustees  Handbook,'*  109-142. 

Though  this  little  handbook  is  now  not  up 
to  the  latest  statutes  and  decisions,  it  concisely 
and  simply  states  the  principles  involved.  The 
pages  cited  cover  the  investments  and  disposi- 
tion of  special  dividends.  A  bond  man  would 
find  it  well  worth  while  to  read  this  entire  little 
volume  of  193  pages. 

INVESTMENTS  OF  TRUSTEES 

Classes  of  trustees: 

Trustees    for   individuals    under    wills    or 
other  documents  creating  trusts. 

Guardians. 

Trustees    for    educational    and    charitable 
institutions. 

The  nature  of  the  investments  of  a  trustee 

[153] 


may  be  determined  by  the  instrument  creat- 
ing the  trust. 
Loringy  112. 

Legal  investments  for  trustees  in  the  absence 
of  express  instructions  in  the  document  creat- 
ing the  trust. 
Loringy  11 3-1 15. 
State    &   City    Supplement,    "Chronicle,"    for 

various  states. 

Classes  of  investments  disapproved. 
Loring,  115. 

Duties  of  the  trustee  in  the  management  of 
the  investments:  Duty  to  keep  the  fund  in- 
vested. 
Loring,  109. 

Principal  and  income. 

Life  tenant  and  remainderman. 
Loringy  1 21-142. 

Dividends: 

Current. 

Extra. 

Stock. 

Loring,  126-135. 

Bonds  bought  at  a  premium. 

Loringy  136. 

Bonds  bought  at  a  discount. 
[154] 


Make  a  written  report  on  what  constitute 
legal  trustee  investments  in  your  own  state. 

INVESTMENTS  OF  SAVINGS  BANKS 

(See  State  &  City  Supplement  of  the  Com- 
mercial &  Financial  Chronicle  for  laws  gov- 
erning the  investment  of  savings  bank  funds 
for  the  several  important  savings  bank  juris- 
dictions.) 

The  savings  bank  as  developed  in  New  York 
and  in  the  New  England  States  may  require  a 
word  of  explanation  for  those  who  are  not 
familiar  with  its  purposes.  These  savings 
banks  are  mutual  institutions,  not  for  profit. 
The  whole  fund,  deposits  and  surplus,  is  a 
trust  fund  for  depositors.  The  law  governing 
the  investment  of  the  fund  has  been  a  matter 
of  historical  development,  and  should  be  con- 
sidered in  that  light,  and  not  as  a  group  of 
scientific  principles  for  tests  of  credit,  by  which 
all  securities  excluded  are  necessarily  inferior 
to  those  included.  For  example,  the  New  York 
law  includes  as  a  legal  investment  bonds  of  the 
New  Jersey  cities  of  Bayonne,  Hoboken,  and 
Jersey  City,  but  excludes  the  bonds  of  Hudson 
County  in  which  all  these  places  are  located. 
It  may  be  considered  generally,  however,  that 
those  bonds  which  are  included  as  legal  savings 
bank  investments  are  worthy  of  high  credit. 

The  Mutual  Savings  Bank. 
Limitations  on  deposits. 
Limitations  on  withdrawals, 

[iSS] 


A  commercial  bant,  national  or  state,  with 
capital  stock,  engaging  in  business  for  profit 
may  be  permitted  to  assume  greater  risks  for 
the  sake  of  profit  because  the  risk  falls  pri- 
marily on  the  stockholders  who  are  making 
the  profit. 

Legal  restrictions  on  savings  bank  invest- 
ment. 

The  law  of  New  York  (or  any  other  juris- 
diction of  more  immediate  interest  to  the  bond 
man)  on  savings  bank  investment. 

(Make  a  comparison  between  two  savings 
bank  investment  laws,  showing  any  differ- 
ences in  the  severity  of  the  tests  applied.) 


156 


TOPIC  XXVI 

Investments  of  Insurance  Companies 

A  bond  man  should  be  familiar  with  the  law 
governing  the  investment  of  the  funds  of  insur- 
ance companies  in  his  own  state. 
Zartmariy  "The  Investments  of  Life  Insurance 

Companies." 
Wolfe,  "The  Examination  of  Insurance  Com- 
panies." 

These  books  contain  much  more  information 
about  insurance  matters  than  it  is  necessary 
for  a  bond  man  with  a  general  clientele  to  know. 
It  is  suggested,  however,  that  a  bond  man  hav- 
ing to  deal  with  insurance  companies  may  very 
profitably  read  them  throughout. 

Classes  of  insurance  companies: 

Fire. 

Life,  fraternal  orders. 

Fidelity. 

Casualty. 

Plate  glass. 
Funds  to  be  invested. 
[1571 


Capital. 

Premiums. 

Character  of  investments. 

For  life  insurance  companies  see  report  of 
Robert  Lynn  Cox,  as  counsel  to  the  Associa- 
tion of  Life  Insurance  Presidents,  printed  in 
part  in  Robins,  "The  Farm  Mortgage  Hand- 
book." 

ZartmaUy  p.  9. 

The  bond  man  studying  this  topic  should 
have  access  to  the  report  of  his  own  state  insur- 
ance department. 

Assets  of  an  Insurance  Company: 

Cash. 

Deferred  and  outstanding  premiums. 

Accrued  interest. 

Premium  notes. 

Policy  loans. 

Mortgage  loans. 

City. 

Farm. 
Real  estate  (usually  limited  to  real  estate 
in  which  the  company  conducts  its  business). 

Collateral  loans. 
United  States  bonds. 
Foreign  public  bonds. 
[158] 


State  bonds. 

County  and  municipal  bonds 
Railroad  bonds. 
Public  utility  bonds. 
Miscellaneous  bonds. 
Railroad  stocks. 
Public  utility  stock. 
Miscellaneous  stock. 

(Take  the  investments  of  an  insurance  com- 
pany and  determine  the  percentage  in  each  of 
these  items.) 

Requirements  for  the   deposit   of  securities 
to  protect  the  business  done  in  the  jurisdiction. 


[159] 


TOPIC  XXVII 

The   Investments  of  National   Banks,   State 
Banks,  and  Trust  Companies 

The  commercial  loan  aspect  of  commercial 
bank  investment,  which  is  the  principal  part  of 
such  investment,  is  not,  of  course,  of  primary- 
importance  to  the  bond  man.  It  is  important, 
however,  that  the  man  who  comes  in  contact 
with  the  commercial  banks  to  have  a  general 
understanding  of  this  matter  so  that  he  may 
understand  the  commercial  banker's  problem 
and  be  able  to  meet  him  intelligently.  And 
for  any  bond  man  this  understanding  should  be 
a  part  of  his  general  financial  knowledge.  So 
here  are  presented  some  of  the  considerations 
of  investment  in  commercial  paper.  This 
topic  opens  the  whole  problem  of  commercial 
banking.  Of  course  it  is  necessary  to  Umit 
the  consideration  of  it  very  closely.  Read  any 
work  on  banking  that  treats  of  bank  credits. 

Special  importance  that  assets  be  liquid. 
(Investment  test,  ^'convertibility.") 

Commercial  paper. 

[i6o] 


Bills  or  notes  based  on  a  commercial  trans- 
action representing  goods  in  the  course  of 
consumption  (circulating  capital)  are  a  liquid 
asset  by  reason  of  their  frequent  maturity 
and  the  possibiHty  of  rediscount. 

General  credit  considerations. 

The  work  of  the  note  broker. 

Liquidity  through  rediscounting. 

Law  authorizing  National  Bank  investments. 

May  not  make  investments  in,  or  secured 
by,  real  estate,  except  for  premises  on  which 
to  transact  its  own  business  and  as  security 
for  or  taken  for  antecedent  debts  (Nat. 
Bank  Act,  Sec.  513). 

May  not  loan  more  than  one-tenth  of 
capital  and  unimpaired  surplus  funds  to  any 
one  borrower. 

(National  Bank  Act,  Section  5200.) 

(The  bond  man  should  look  up  the  law  regu- 
lating the  investments  of  state  banks  and  trust 
companies  in  his  own  state.) 

Investments  of  Postal  Savings  Banks. 

Investments  of  banks  in  bonds  as  secondary 
reserve. 

Secondary  reserve — meaning  of  term. 

Character  of  bonds — marketability — active 
listed. 


1 161] 


TOPIC  XXVIII 

General  Principles  of  Investment;  Fraudulent 
and  Investment  Schemes 

GENERAL  PRINCIPLES  OF  INVESTMENT 

Distribution  of  risk: 

Limiting  proportion  of  capital  invested  in 
any  one  investment. 

Limiting  the  proportion  of  capital  invested 
in  any  one  kind  of  enterprise. 

Distributing  investments  over  more  than 
one  geographical  area. 

Selecting  investments  having  varied  dates 
of  maturity. 

(Analyze  some  list  of  investment  holdings 
from  these  viewpoints.) 

FRAUDULENT  INVESTMENT  SCHEMES 

Types  of  offerings  which  should  arouse  sus- 
picion. 

Gerstenberg,    "Materials    of    Corporation     Fi- 
nance," 377-403. 

Warnings  in  an  investment  offering: 

The  promise  of  exceptional  returns. 

1 162] 


Dwelling  on  the  large  profits  made  in  other 
enterprises. 

Work  of  the  post  office  department  in  sup- 
pressing fraud. 

"Blue  Sky  Laws." 

Contrasting  types  of  legislation  as  acts  of 
various  states  of  the  United  States  which 
interpose  an  official  supervision  of  investment 
offerings,  compared  with  the  requirements  of 
such  legislation  as  the  English  Prospectus  Act 
which  seeks  the  same  result  by  requiring  a 
publication  of  facts. 


[163] 


TOPIC  XXIX 

Investments  and  Taxation 

Lyon,  "Principles  of  Taxation"  (Report  to 
Taxation  Committee,  Investment  Bankers 
Association). 

A  bond  man  should  know  precisely  the 
law  of  his  own  state  covering  the  taxation 
of  all  classes  of  investments.  He  should 
also  be  familiar  with  the  Federal  Income  Tax 
law  and  especially  with  its  treatment  of 
income 'from  state  and  municipal  bonds  and 
from  dividends. 
Montgomery,  "Income  Tax  Procedure." 

State  and  local  taxation. 
The  general  property  tax. 
Lyon,  "Taxation,"  31-58. 

The  classified  property  tax. 
Lyon,    "Taxation,"    73-89.     (Especially   foot- 
notes.) 

The  income  tax  as  a  form  of  state  and  local 
taxation. 

Wisconsin    and    Massachusetts    Income 
Tax  Laws. 

[164] 


Lyon,  "Taxation,"  15  (though  the  objections 
to  an  income  tax  seem  valid,  perhaps  they 
are  given  too  much  weight  as  compared  with 
the  advantages). 

Inheritance  taxes  as  affecting  investments. 
Lyon,  "Taxation,"  108-112. 

Investments  which  are  exempt    from    state 
and  local  taxes. 

Usual  exemption  by  a  state  of  its  own  state 
and  municipal  bonds  from  state  and  local 
taxation. 

The  Federal  Income  and  Inheritance  Tax : 

Tax  covenant  bonds,  i.  e.,  bonds  on  which 
the  corporation  which  issued  them  cove- 
nanted to  pay  free  from  any  tax  which  the 
corporation  might  be  required  to  withhold. 

The  exemption  of  income  from  state  and 
municipal  securities — on  the  principle  that 
it  is  not  constitutional  for  the  Federal  Govern- 
ment or  a  state  government  agency  to  tax 
the  securities  of  each  other. 

The  treatment  of  dividends  in  the  Federal 
Income  Tax  law  and  why. 


[165] 


TOPIC  XXX 
Economic  Conditions  and  Investment 

Chamberlain,  455-512. 

** America's  Changing  Investment  Market." 
Annals  of  the  American  Academy  of  Politi- 
cal and  Social  Science. 

Statistical  figures: 
Building  statistics. 
Bank  statistics: 

Clearings. 

Reserves.  ' 

Money  rates. 

Business  failures. 

Immigration  and  emigration. 

Imports  and  exports,  balance  of  trade  and 
gold  movements. 

Gold  production  and  the  quantity  theory  of 
money*  fy\V  -^  ff-  »^'  v ' 

Commodity  prices, 

Crop  conditions, 

1 166  J 


Corporation  earnings. 

The  relation  of  security  prices  to  interest  rates. 

Interest  rates  an  index  of  the  demand  and 
supply  of  capital,  depending  on  general  credit 
conditions. 


ti67l 


B(X)KS  REFERRED  TO  IN  OUTLINE  OF  COURSE 
IN  INVESTMENTS 

Adams — Science  of  Finance.  By  H.  C.  Adams,  New 
York,  H.  C.  Holt  &  Co.     1899,  $3.00. 

Bastable — Public  Finance.  By  C.  F.  B  as  table.  New 
York,  MacMillan  &  Co.     1903.     ^3.50. 

Chamberlain — The  Principles  of  Bond  Investment.  By 
Lawrence  Chamberlain.  191 1.  New  York.  Henry 
Holt  &  Company. 

COLLVER — How  to  Analyze  Industrial  Securities.  By 
Clinton  Collver.  New  York,  191 7,  Moody's  In- 
vestors Service.     ^2.50. 

Dewing — Corporate  Promotions  and  Reorganizations.  By 
Arthur  S.  Dewing.  Boston.  Houghton  Mifflin 
Co.,  ^2.50. 

Gerstenberg — Materials  of  Corporation  Finance.  By 
Charles  W.  Gerstenberg,  Professor  of  Finance, 
New  York  University,  School  of  Commerce,  Ac- 
counts and  Finance.  New  York.  191 5.  Pren- 
tice Hall,  pp.  1008,  $5.00. 

Heft — Holders  of  Railroad  Bonds  and  Notes,  Their  Rights 
and  Remedies.  By  Louis  Heft.  New  York.  E. 
P.  Dutton  &  Co.     1916.    ^2.00. 

LoRiNG — A  Trustee's  Handbook.  By  Augustus  Peabody 
Loring.  Boston.  Little,  Brown  &  Co.  1907, 
$2.50. 

Lyon — Corporation  Finance.  By  Hastings  Lyon.  Com- 
plete Edition.  1916.  Vols.  I  and  II  bound  to- 
gether.    Boston.    Houghton  Mifflin  Co.,  ^3.00. 

[168] 


Lyon — Principles    of     Taxation.     By     Hastings    Lyon. 

Boston.     Houghton  Mifflin  Co.,  75  cents. 
Montgomery — 191 7.     Income  Tax  Procedure.     By  Rob- 
ert H.  Montgomery,  C.  P.  A.     New  York.     Ronald 

Press  Co.     $2.50. 

National  Bank  Acty  as  amended.  Federal  Reserve 

Acty  as  amendedy  and  other  laws  relating  to  National 

Banksy  July  i,  191 5.     Washington,  Superintendent 

of  Documents,  25  cents. 

Postal  Savings   Banks  Regulations  for  Guidance 

of  Qualified  Banks y  etc.     Includes  text  of  act.     191 3. 

Washington.     Superintendent    of    Documents,    5 

cents. 
Plehn — Introduction    to    Public    Finance.     By    Carl    C. 

Plehn.     New  York.    The  MacMillan  Co.,  pp.  480. 

1911.   $1.75. 
Raymond — American  and  Foreign  Investment  Bonds.     By 

William  L.  Raymond.     Boston.     1916.    Houghton 

Mifflin  Co.,  $3.00. 
Robins — The  Farm   Mortgage  Handbook.     By   Kingman 

Nott     Robins.     New     York.     1916.     Doubleday, 

Page  &  Co.,  $1.25. 

Secrist — Bulletin  of  the  University  of  Wisconsin  No.  637, 
Economics  and  Political  Science,  Series  Vol.  8,  No.  1, 
"An  Economical  Analysis  of  Constitutional  Re- 
strictions upon  Public  Indebtedness  in  the  United 
States."  By  Horace  Secrist,  University  of  Wis- 
consin.    1914.   40  cents. 

Sprague — The  Accountancy  of  Investment.  By  the  late 
Charles  E.  Sprague,  C.  P.  A.  Revised  by  Leroy 
L.  Perrine,  C.  P.  A.  Third  Edition,  1914.  New 
York,  Ronald  Press  Co.,  $5.00. 

Stocks  and  the  Stock  Market.  Annals  of  the 
American  Academy  of  Political  and  Social  Science. 
Philadelphia.     1910,  $1.50. 

Thompson — Costs  and  Sources  of  Farm  Mortgage  Loans 
in  the  United  States.  By  C.  W.  Thompson.  Wash- 
ington.    191 6.    Apply  Bureau  of  Printing. 

[169] 


Thompson — Factors  Affecting  Interest  Rates  and  Other 
Charges  on  Short  Time  Loans.  By  C.  W.  Thomp- 
son. Washington.  1916.  Apply  Bureau  of 
Printing. 

Various  Authors — Bonds  .  as  Investment  Securities. 
American  Academy  of  Political  and  Social  Science. 
1907.   $1.50. 

Various  Avtuoks— Practical  Real  Estate  Methods.  Thirty 
chapters  written  by  different  authors.  New  York. 
191 4.     Doubled  ay,  Page  &  Co.,  $2.50. 

Various  Authors — You  and  Your  Broker y  Magazine  of 
Wall  Street.     New  York.     191 7.     $1.00. 

Wolfe — The  Examination  of  Insurance  Companies.  By 
S.  Herbert  Wolfe.  New  York.  1910.  The  In- 
surance Press,  ^3.00. 

Zartman — The  Investment  of  Life  Insurance  Companies. 
By  L.  W.  Zartman.  1906.  New  York.  Henry 
Holt  &  Co.,  $1.50. 

The  Philadelphia  Commercial  Museum  main- 
tains a  financial  department  open  to  subscribers, 
from  which  they  may  obtain  financial  informa- 
tion. 


[170] 


THE   COUNTRY   LIFE   PRESS 
GARDEN  CITT,  N.  Y. 


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